Toto, We're Not in West Texas Anymore; A Challenging Examination of the Historical Global Crude Oil Production Capacity, Demand, Price and the Changing Elasticies

Abstract

Abstract The basic fundamentals and drivers of changing supply and demand and their affect upon price have changed dramatically through time. Do you recall in the early 80's when the popular belief was that crude would go to $100/bbl or in 1998 when many believed that crude would return to below $10/bbl for the foreseeable future. The results of this paper will better equip the reader to understand why neither of these beliefs were correct and never will be. This paper will also provide a clearer understanding of the macro supply, demand and pricing environment to assist both the engineers and managers with their critical long-term decision-making. The drivers in both the short-term and the long-term perspectives of the global crude oil production capacity, demand and price differ. The short-term perspective, which tends to have a greater influence on our strategies and decisions, is typically driven by inventories and influenced by politics, perceptions, seasonal factors and supply disruptions, among others. The main focus of this paper is on the longer-term perspective or the macro level of global crude oil production capacity, demand and pricing from 1945 to present. In particular, the changes in the elasticity of global demand, supply and price are analyzed and highlighted. Briefly, the regional supply and demand will also be examined. Trend analysis will include both artificial as well as natural effects such as maturing fields, regulatory effects, and the changing differential (excess capacity) between demand and supply. We will discuss the potential supply and price trends assuming demand continues to increase at the current rate.