Opinion: Why We'll See $200 Oil Soon



Will oil prices drop to $20, or will they catapult to $200?  In the short-term, it is anyone's guess.  In the long-term, the answer is simple -- if we use a little history and a bit of common sense. Growing up in an oil family and working within the industry for the past decade, I have experienced some interesting times.  The oil and gas industry is notorious for its cyclical nature and dramatic ups and downs.  And no matter how many times you go through these cycles, it seems "When it is up, we don't see how it can ever go down; and when it is down, we don't see how it can ever go up," as a good friend recently summed it up. With that said, I do not believe low commodity prices and rig counts will be here for long.  Simply put, our industry rises and falls with the price of oil and gas, and two simple truths will provide upward pressure on prices for decades to come.  Those truths:  1.) supply is finite, and 2.) the world population continues to grow at a tremendous rate.

A FINITE RESOURCE

If you look at U.S. oil production over the last 30 years, you can clearly see there is a limit to production. Even with the recent years' high commodity prices, the U.S. was only able to produce a limited amount of oil and gas relative to prior years' production levels.  The U.S. is not unique in that regard.  Production will inevitably decline for every country.

Monthly U.S. Crude Oil Field Production

To find further proof that oil and gas is becoming more difficult to find, we need not look further than the offshore drilling market.  What offshore rig class has a relentlessly high utilization rate (rigs under contract/rig supply) regardless of commodity price?  Deepwater rigs.  When oil was $20/barrel in 1999, deepwater rigs rated for 4,500+ feet of water were utilized at 85%. Today, deepwater rig utilization is 92%; and dayrates for these rigs have risen from $122k/day to $376k/day in eight years -- even as the supply of these rigs has increased.   

Monthly U.S. Crude Oil Field Production

Rigs go where the oil is, and that is now in deeper waters.  There will be big finds in shallow waters, but they are diminishing in number every year.

POPULATION GROWTH

Monthly U.S. Crude Oil Field Production

World population continues to grow unfettered. In 1950, there were 2.5 billion people on the planet.  Today, there are 6.7 billion; and in 2050, there will be 9 billion. A larger global population equates to more demand for energy; and while non-carbon-based energy sources will play a larger role in the future, they cannot completely satiate the world's appetite for energy. 

Hand-in-hand with this spike in population comes massive emerging economies.  In 1978, China made several monumental policy changes that created a more capitalistic environment, which has yielded tremendous fruit for the people of China.  India boasts a similar story, and surely there will be more emerging economies in the years to come.

Combine population growth with an increase in the number of people capable of achieving a capitalist dream of their own, and you can see the demand-side of the picture expanding by leaps and bounds over the next 30 years.  Supply is decreasing, and demand is increasing at a macro level, which can only mean one thing for long-term oil prices: They are headed up.

 



WHAT DO YOU THINK?


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