Is the world not running out of oil?

Thu, 29 Nov Pre-Open

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Oil is a precious commodity, as suggested by its consistently rising prices. And it's not just the demand factor reflecting in price. The oil prices, more than the demand supply logic, follow speculations that are often inflationary in nature, leading to a price premium that pure economics fails to justify.

Oil being the key source of global energy needs has been a subject of major studies and theories. Peak oil theory is one such famous and interesting theory. Also a scary one. It suggests that there will be a time when oil wells will be producing oil at their maximum potential and will then signal a progressive decline leading to the supply of oil falling short of demand. Infact, some have suggested that we have already reached that peak point. But if a recent industry report is to be believed, the theory seems to be falling apart. As per the report, the offshore discoveries are likely to keep oil flowing. The companies across the globe plan to drill a total of 301 offshore wells in 2013 itself. We all know that drilling wells is one thing and discovering oil another. So keeping the margin of safety, a success rate of just 25% implies an extra supply of 23 billion barrel of oil equivalent. This is around 28% higher than the average annual production in new offshore discoveries in last 12 years.

While this eases the concerns oil availability, what is also crucial here is its impact on prices.

And we wonder if these discoveries will also lead to softening in oil prices. One must not forget that drilling costs are on the rise. Also, with increasing thrust on environmental protection, the exploration may take longer or may even turn out to be cost prohibitive. Under such circumstances, the oil companies will be interested to drill only if oil prices remain high- either for fundamental or speculative reasons. But then, there are other factors that may come into play such as availability, usage and cost of alternative sources of energy. We don't know the future. But what is certain is that crude oil with all its vagaries will continue to be an interesting topic among investors.