5 March 2009

Non-Opec Oil Production Has Peaked

Yawn. Non-OPEC oil production peaked in late 2006 above 41 Mb/day. It’s unlikely we’ll ever see those production levels again. It’s also unlikely, if you follow oil supply data, that you'd be shocked by that revelation. That said, it’s worth laying out how this happened.

From January 1, 2003 to the price highs 2008, the price of oil went from 30.00 to 150.00. Now let’s take a look at non-OPEC oil production. Remember, much of non-OPEC supply is free market oil which leverages the latest technology and benefits from the profit motive. OPEC supply is about politics, state control, and kingdoms. Non-OPEC supply is about earnings per share, deepwater rigs, and high-tech engineering. So let’s take a trip through Econ 101, where supply always responds to higher prices.

Annual averages of non-OPEC Production in Mb/day

2002 Average 39,520
2003 Average 40,299
2004 Average 40,989
2005 Average 40,799
2006 Average 40,850
2007 Average 40,838
2008 Average 40,319

Although monthly production peaked in late 2006, you can already see indications of the first faltering in the annual averages in 2004. That’s a tell-tale sign of the transition from a legacy inventory of easier oil, which is extracted easily, to a newer inventory of more difficult oil.

If you are not sobered enough by the total lack of supply response, consider this ominous fact: Russia, which is the largest producer among non-OPEC countries, was able to ratchet up production this decade. Russia would add another 2 Mb/day to non-OPEC production in the annual time series above. Astonishing. Even though Russia too has now peaked, without Russia’s massive increase in supply, non-OPEC supply would have fallen into the the bull market in oil!

Tell that to your Econ 101 professor.

In case you do in fact run into your old Econ professor, I’d like to give readers a simple way to talk about non-OPEC supply. The next time you’re talking oil with friends and family, hit ‘em with this: For six years non-OPEC supply was flat, around 40+ Mb/day. This even though prices rose from 30.00 to 150.00. In fact, without Russia, non-OPEC supply would have fallen. What happened is that the legacy cheap oil was increasingly replaced by newer, harder, expensive oil. And now that the price has crashed back down to levels where we began the whole journey? The legacy cheap oil is depleted. The current oil was built upon much higher prices. So, just as you would expect, non-OPEC supply is on a crash course.

Further Reading:

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