Bad Numbers

Can a more efficient oil industry make up for a global decline in drilling?
Can a more efficient oil industry make up for a global decline in drilling?

On the surface, where drilling rigs roam, the numbers don’t look good.

That’s why a growing number of analysts are talking about a potential oil price spike, possibly north of $100-a-barrel again.

Lacklustre international drilling activity, against a backdrop of ever-rising levels of consumption, is supportive of the higher-prices-yet-to-come thesis.

A review of regions outside the U.S. and Canada shows a tepid response to the recent rise in oil prices (Figure 1). So far, the producers’ extra cash flow is not going back into the ground to drill out new barrels.

Admittedly, drilling technology and rig productivity have both improved dramatically in the past four years. But those headlines and innovation dynamics are largely a North American phenomenon. The response to competition from most of the rest of the world has been to cut investment, turn off valves, crimp supply and hope for elevated prices (again).

Middle Eastern rig activity remains unchanged at 300ish since 2014. The region is low-cost and prolific, but oil production growth has levelled off. Some of that is due to OPEC quotas. The rest is a consequence of restrained investment, civil strife and geopolitical jockeying. Countries like Iraq have slashed their drilling in half. Iran, subject to a new round of sanctions this week, is unlikely to see much new investment.

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