Portrait of Price vs Non-Opec Supply

Non-OPEC crude oil supply peaked six years ago in 2004, at a sustained annual average of 42.068 mbpd (million barrels per day). Supply then fell every year thereafter through 2008, before making a small recovery in 2009. What’s telling, of course, is that supply peaked in a year when the price of oil averaged only $41.51 per barrel. Yes, I’ve made this point before but it’s worth making again: Non-OPEC oil supply, which accounts for 60% of total world supply, failed completely to make a response to price. To illustrate, I have drawn up a chart showing both: average annual Non-OPEC supply vs. the average annual price, of oil.

Readers will no doubt draw their own conclusions from this chart. I will offer you mine. The supply surge you see coming out of 1999 is a depiction of how the oil business actually works. And that is producers are merely looking to make a healthy spread between the cost of production and the market price. In that 1999-2004 period the final, remaining portions of easy oil were pumped out of the ground among Non-OPEC producers. That spike, that moonshot of supply between 1999 and 2004 is not responding to an advance in the price of oil. It’s responding to a good enough price of oil, compared to production costs.

The peak in supply in 2004, accordingly, is the point in time where production costs (and time delays) begin to show up in the global supply system. Thus, just as the price of oil starts its heroic trajectory higher from 56.64 to 66.05, and then on to 72.34 and finally 99.67, the cost of oil production in Non-OPEC races ahead as the availability of new supply slows down and decline from existing fields start to take its toll. It is only with the advent of prices above 70.00 per barrel that Non-OPEC is able to start fighting decline, as it reaches for ultra-deep offshore, unconventional sources like tar sands, and conducts enhanced oil recovery on aging fields.

Now for the really bad news: there will be no supply surge this time from Non-OPEC when the world next exits recession. Unlike the last decade, when alot of idle supply across Non-OPEC (especially from Russia) was turned back on as the world exited those recession(s), Non-OPEC will only be able to increase oil supply now at much higher prices. How high? Well, it’s not even clear that Non-OPEC could repeat its 2004 performance of a sustained 42.068 mbpd at any price. We are actually looking at a situation where a certain floor in price is needed to simply keep 60% of total oil supply from declining even further. But should the world exit recession, I would expect a new normal for the price of oil at 120.00 dollars per barrel.

-Gregor

Data Notes: All data updated through the February 17, 2010 release of International Petroleum Monthly, which has supplied global production figures through November of 2009.

  • http://www.phitempest.com/ Timaeus

    This is a great chart Gregor! It really reveals the fundamentals of the oil supply question. Basically no supply response (outside of OPEC) from the massive price rises of 04-08! Depletion and bringing on new unconventional supplies are bigger problems than most people get. Those who have worked in the oil industry understand the challenges better. Reduced investment over the last year+ is setting us up for the next spike.

    It would be interesting to see the OPEC oil production numbers overlaid on this chart.

  • http://www.phitempest.com/ Timaeus

    This is a great chart Gregor! It really reveals the fundamentals of the oil supply question. Basically no supply response (outside of OPEC) from the massive price rises of 04-08! Depletion and bringing on new unconventional supplies are bigger problems than most people get. Those who have worked in the oil industry understand the challenges better. Reduced investment over the last year+ is setting us up for the next spike.

    It would be interesting to see the OPEC oil production numbers overlaid on this chart.