Going Deep

The next time you hear someone chattering with certainty about "peak oil" just remember that given the constantly changing dynamics of price, cost, supply, demand, and technology in the oil industry, the truth is that no one really knows how much oil there is out there and when we potentially could exhaust the world's supply. Front page article in yesterday's WSJ explained that US oil companies--increasingly limited from exploring for new oil on land due to environmental, political, and stability concerns--are pushing ever deeper in their off-shore exploration:

Falling output from old fields has stoked fears that world-wide production could be nearing its peak. Global oil reserves--a measure of oil that has been found but not yet produced -- fell in 2008 for the first time in a decade, according to BP's annual statistical review. Moreover, there are signs demand could soon catch up to supply. Global oil consumption has risen by 5.4 million barrels a day in the past five years, while production has risen by just 4.8 million barrels a day.

Such fears helped drive a rapid run-up in oil prices to nearly $150 a barrel in July 2008. The global recession cooled demand, driving down prices, although many experts expect prices to rise again when the economy recovers. Already, prices have rebounded to about $80 a barrel, from under $35 in December 2008.

Rising prices have spurred offshore exploration. By 2008, about 8% of global oil production came from deepwater fields.

Yet even the biggest deepwater projects aren't enough to put a dent in global supply problems on their own. The world's largest deepwater platform, BP's Thunder Horse in the Gulf of Mexico, produces 250,000 barrels of oil a day, just 0.3% of global consumption.

"These discoveries are changing the debate," says Ed Morse, chief economist for LCM Commodities, a brokerage firm. What remains unclear, he says, is whether the deepwater projects will ensure that new discoveries continue to meet demand.

Many in the industry argue the new fields have expanded the limits of where the industry can find oil, potentially delaying a decline in global production.

"There are vast unexplored areas in deep water, so tremendous opportunities for growth," says Steven Newman, president of Transocean Ltd., which owns the Clear Leader rig.

Such deepwater exploration and drilling is quite difficult and expensive. And we've no doubt passed the "peak" in easy to extract and cheap oil. But with continued growth in global demand, advances in technology, and oil priced at a point that makes it feasible, there also is no doubt that oil companies will continue to explore for and discover oil in places that haven't previously even been considered in the supply picture in peak oil calculations.