New scientific research suggests that the world faces an imminent oil crunch, which will trigger another financial crisis.
A report by HSBC shows that contrary to the commonplace narrative in the industry, even amidst the glut of unconventional oil and gas, the vast bulk of the world’s oil production has already peaked and is now in decline; while European government scientists show that the value of energy produced by oil has declined by half within just the first 15 years of the 21st century.
The upshot? Welcome to a new age of permanent economic recession driven by ongoing dependence on dirty, expensive, difficult oil… unless we choose a fundamentally different path.
Last September, a few outlets were reporting the counterintuitive findings of a new HSBC research report on global oil supply. Unfortunately, the true implications of the HSBC report were largely misunderstood.
The HSBC research note?—?prepared for clients of the global bank?—?found that contrary to concerns about too much oil supply and insufficient demand, the situation was opposite: global oil supply will in coming years be insufficient to sustain rising demand.
Yet the full, striking import of the report, concerning the world’s permanent entry into a new age of global oil decline, was never really explained. The report didn’t just go against the grain that the most urgent concern is ‘peak demand’: it vindicated what is routinely lambasted by oil majors as a myth: peak oil?—?the concurrent peak and decline of global oil production.
The HSBC report you need to read, now
INSURGE intelligence obtained a copy of the report in December 2016, and for the first time we are exclusively publishing the entire report in the public interest.
Read and/or download the full HSBC report by clicking below:
Headquarted in London, UK, HSBC is the world’s sixth largest bank, holding assets of $2.67 trillion. So when they produce a research report for their clients, it would be wise to pay attention, and see what we can learn.
Among the report’s most shocking findings is that “81% of the world’s total liquids production is already in decline.”
Between 2016 and 2020, non-OPEC production will be flat due to declines in conventional oil production, even though OPEC will continue to increase production modestly. This means that by 2017, deliverable spare capacity could be as little as 1% of global oil demand.
This heightens the risk of a major global oil supply shock around 2018 which could “significantly affect oil prices.”
The report flatly asserts that peak demand (the idea that demand will stop growing leaving the world awash in too much supply), while certainly a relevant issue due to climate change agreements and disruptive trends in alternative technologies, is not the most imminent challenge:
“Even in a world of slower oil demand growth, we think the biggest long-term challenge is to offset declines in production from mature fields. The scale of this issue is such that in our view rather there could well be a global supply squeeze some time before we are realistically looking at global demand peaking.”
Under the current supply glut driven by rising unconventional production, falling oil prices have damaged industry profitability and led to dramatic cut backs in new investments in production. This, HSBC says, will exacerbate the likelihood of a global oil supply crunch from 2018 onwards.
Four Saudi Arabias, anyone?
The HSBC report examines two main datasets from the International Energy Agency and the University of Uppsala’s Global Energy Systems Programme in Sweden.
The latter, it should be noted, has consistently advocated a global peak oil scenario for many years?—?the HSBC report confirms the accuracy of this scenario, and shows that the IEA’s data supports it.
The rate and nature of new oil discoveries has declined dramatically over the last few decades, reaching almost negligible levels on a global scale, the report finds. Compare this to the report’s warning that just to keep production flat against increasing decline rates, the world will need to add four Saudi Arabia’s worth of production by 2040. North American production, despite remaining the most promising in terms of potential, will simply not be able to fill this gap.
Business Insider, the Telegraph and other outlets which covered the report last year acknowledged the supply gap, but failed to properly clarify that HSBC’s devastating findings basically forecast the longterm scarcity of cheap oil due to global peak oil, from 2018 to 2040.
The report revises the way it approaches the concept of peak oil?—?rather than forecasting it as a single global event, the report uses a disaggregated approach focusing on specific regions and producers. Under this analysis, 81% of the world’s oil supply has peaked in production and so now “is post-peak”.
Using a more restrictive definition puts the quantity of global oil that has peaked at 64%. But either way, well over half the world’s global oil supply consists of mature and declining fields whose production is inexorably and irreversibly decreasing:
“If we assumed a decline rate of 5%pa [per year] on global post-peak supply of 74mbd?—?which is by no means aggressive in our view?—?it would imply a fall in post-peak supply of c.38mbd by 2030 and c.52mbd out to 2040. In other words, the world would need to find over four times the size of Saudi Arabia just to keep supply flat, before demand growth is taken into account.”
What’s worse is that when demand growth is taken into account?—?and the report notes that even the most conservative projections forecast a rise in global oil demand by 2040 of more than 8mbd above that of 2015?—?then even more oil would be needed to fill the coming supply gap.
But with new discoveries at an all time low and continuing to diminish, the implication is that oil can simply never fill this gap.
Technological innovation exacerbates the problem
Much trumpeted improvements in drilling rates and efficiency will not make things better, because they will only accelerate production in the short term while, therefore, more rapidly depleting existing reserves. In this case, the report concludes:
“… the decline-delaying techniques are only masking what could be significantly higher decline rates in the future.”
This does not mean that peak demand should be dismissed as a serious concern. As Michael Bradshaw, Professor of Global Energy at Warwick University’s Sloan Business School, told me for my previous VICE article, any return to higher oil prices will have major economic consequences.
The HSBC report takes the position that prices will have to rise eventually, because the drop in investment due to declining profitability amidst the current glut will make a supply squeeze inevitable. Better and more efficient drilling creates a glut now: but it also accelerates depletion, meaning that the lower prices and oil glut today is a precursor of tomorrow’s higher prices and supply squeeze.
There’s another possibility, which could mean that prices don’t rise as HSBC forecasts. In this scenario, the economy remains too weak to afford an oil price hike. Demand for oil stays low because economic activity remains tepid, while consumers and investors continue to seek out alternative energy sources to fossil fuels. In that case, the very inertia of a weakening economy would pre-empt the HSBC scenario, and the industry would continue to slowly crush itself out of the market due to declining profitability.
Price spikes, economic recession
But what if the HSBC supply forecast is correct?
Firstly, oil price spikes would have an immediate recessionary effect on the global economy, by amplifying inflation and leading to higher costs for social activity at all levels, driven by the higher underlying energy costs.
Secondly, even as spikes may temporarily return some oil companies to potential profitability, such higher oil prices will drive consumer incentives to transition to cheaper renewable energy technologies like solar and wind, which are already becoming cost-competitive with fossil fuels.
That means a global oil squeeze could end up having a dramatic impact on continued demand for oil, as twin crises of ‘peak oil’ and ‘peak demand’ end up intensifying and interacting in unfamiliar ways.
The HSBC report’s specific forecasts of global oil supply and demand, which may or may not turn out to be accurate, are part of a wider story of global net energy decline.
A new scientific research paper authored by a team of European government scientists, published on Cornell University’s Arxiv website in October 2016, warns that the global economy has entered a new era of slow and declining growth. This is because the value of energy that can be produced from the world’s fossil fuel resource base is declining inexorably.
The paper – currently under review with an academic journal – was authored by Francesco Meneguzzo, Rosaria Ciriminna, Lorenzo Albanese, Mario Pagliaro, who collectively conduct research on climate change, energy, physics and materials science at the Italian National Research Council (CNR)?—?Italy’s premier government agency for scientific research.
According to HSBC, oil prices are likely to rise and stabilise for some time around the $75 per barrel mark due to the longer term decline in production relative to persistent demand. But the Italian scientists find that this is still too high to avoid destabilising recessionary effects on the economy.
The Italian study offers a new model combining “the competing dynamics of population and economic growth with oil supply and price,” with a view to evaluate the near-term consequences for global economic growth.
Data from the past 40 years shows that during economic recessions, the oil price tops $60 per barrel, but during economic growth remains below $40 a barrel. This means that prices above $60 will inevitably induce recession.
Therefore, the scientists conclude that to avoid recession, “the oil price should not exceed a threshold located somewhat between $40/b [per barrel] and $50/b, or possibly even lower.”
More broadly, the scientists show that there is a direct correlation between global population growth, economic growth and total energy consumption. As the latter has steadily increased, it has literally fueled the growth of global wealth.
But even so, the paper finds that the world is experiencing:
“… declining average EROIs [Energy Return on Investment] for all fossil fuels; with the EROI of oil having likely halved in the short course of the first 15 years of the 21st century.”