Oil – The next revolution?

31st August 2012

A new study on global oil supply published by the Harvard Kennedy School has garnered several headlines in the press over the past few weeks. The paper (“Oil: the next revolution”) focuses on the idea that the world may be awash with new supply by 2020.

The paper projects non-OPEC supply to 2020 as follows:

 

USA

+3.5m b/day

Canada

+2.2m b/day

Brazil

+2.5m b/day

Rest of non-OPEC

-0.3m b/day

Total non-OPEC supply

+6.9m b/day

The real problem it then highlights is potential growth in OPEC supply to 2020, which can be divided into four buckets:

 

Iraq

+5.1m b/day

Venezuela/Iran/Nigeria/Angola (“VINA”)

+1.8m b/day

Libya

+1.2m b/day

Saudi Arabia/UAE/Kuwait (“SUK”)

+2.0m b/day

Total OPEC supply

+10.1m b/day

The first comment to make is that total forecast non-OPEC supply growth of 6.9m b/day represents an increase of around 0.9m b/day each year between now and 2020. We think this can be easily absorbed by global demand growth which we believe will average a minimum of 1.0m b/day and likely be higher (up to 1.5m b/day). And what about OPEC supply growth? We think the answer to this is that OPEC will not in a thousand years  let their production grow by  10.1 m b/day, unless it was required to match demand. What will happen instead, we believe, is that Iraq production will be allowed to expand (if it can) by 3m b/day and SUK will cut by 3m b/day to make room; VINA production will be allowed to rise by 1.0m b/day and Libya by 0.8m b/day – a total of 1.8m b/day which translates to an increase of around 0.2m b/day each year. This can also be absorbed by global demand growth.

 

 

Harvard view

Guinness view

Iraq

+5.1m b/day

+3.0m b/day

Venezuela/Iran/Nigeria/Angola

+1.8m b/day

+1.0m b/day

Libya

+1.2m b/day

+0.8m b/day

Saudi Arabia/UAE/Kuwait

+2.0m b/day

-3.0m b/day

Total OPEC supply

+10.1m b/day

+1.8m b/day

If demand growth averaged nearer 1.5m b/day rather than the 1m b/day, a higher rate of total VINA and Libya supply growth can be absorbed.

Underpinning these comments is a firm belief in OPEC’s ability to defend their stated goal of $85+ (in today’s money): they will not let OPEC supply growth (and Russia can be included too) derail this.

 

Will Riley joined Guinness Asset Management in May 2007 and is co-manager of Guinness Global Energy Fund and the Guinness Global Money Managers Fund.

Prior to joining Guinness, Will was employed by PricewaterhouseCoopers for 6 years, first in the London Middle Market Assurance Team, then as a valuation specialist in the Valuation & Strategy division. Will qualified as a Chartered Accountant in 2003 and has an MA in Geography from Cambridge.

Read more from the Guinness Energy Team

 

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