Historically, questions of oil supply have been addressed by citing volumes of reserves and/ or resources. Supply, however, cannot be estimated from volumes alone but must include economic considerations. An optimistic outlook on global oil supply commonly will include large volumes of unconventional resources or undiscovered fields. While very large` such resources cannot add proportionately large supply rates due to logistical limitations, project cost and funding constraints. One need only consider that adding a million barrels per day capacity from unconventional resources and deep water fields costs from 3 to 6 times as much as developing giant fields in the Middle East.
This talk summarizes global oil supply, the role of giant fields, cost of replacement, physical limits to supply and presents some implications to foreign policy. Importantly, only 320 giant oil fields (of more than 17,000) contribute about 60 percent of daily production. Thus, understanding the giant and super giant fields is the cornerstone to forecasting near term supply (10 -20 years). Along with the decline of the giants production capacity, sound future energy policy must take into account the complex economic interdependence created by large pools of dollar liquidity resulting uniquely from the oil trade.
The large amount of capital flowing to the Gulf States (around $500 billion/ year) is largely profit. This capital, when leveraged, produced the cheap and abundant credit which has encouraged excessive sovereign debt and private borrowing. We surmise the low cost of borrowing led to over valuations (particularly in real estate) and when those investments faltered, the financial community became aware of their risk exposure which ultimately led to the financial crisis.
Protecting foreign sources of U.S. supply will also be an increasing drag on American national security and the choice for America is clear. In short, should the U.S. have an oil policy of "being the last man standing" or should the U.S. transition to other sources such as natural gas for transportation? The answer to that question means our traditional discussions about volume of resource in the ground must be expanded to include physical limitations of supply and cost of supply.
Whether global production rate is at its peak or not, does not matter and we emphasize that the world is not running out of oil. The world is, nonetheless, becoming limited in its physical ability and economic capacity to add production, particularly from the high cost tier of oil resource. This situation will become acute as the 60 percent of the world’s production, which is from the supergiant fields, starts to decline.
It is not a matter of when the oil runs out, rather, it's a matter of when the supply of money to buy imported oil is exhausted.
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