Oil supply shortage? Really?

“We’re able to do, I would say, 40% more per dollar of activity than we did 4 or 5 years ago at $100 oil”

Bob Dudley on BP’s Q2 2018 results.

When you are told there might be a supply shortage you need to understand how much model risk there is in these sort of forecasts. The IEA graph in the header, a variant on the new peak oil theme, being used as the rationale for why a “recovery” for offshore may be just around the corner, doesn’t show the output implications of the cost deflator.

Bob Dudley is saying that BP are getting 1.4x output for each dollar 4-5 years after the “great oil price crash” of 2014. That ~$500bn of expenditure in 2018 buys you what ~$700bn did 4 years ago (roughly what was being produced in 2013?).

This just isn’t consistent with a some sort of “snapback recovery” for offshore that people try and credibly speak of (and that some business models are based). Mean reversion only works as a theory when the underlying mechanics haven’t changed. The offshore supply chain needs to be realistic about the implications of this sort of comment that is clearly being translated into E&P company CapEx plans. Whether the offshore industry believes it or not this is the new narrative and reality in E&P companies and capital is being allocated accordingly.

 

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