For Your Perusal: The Glory of Free Market Oil Supply

40% of global oil supply is provided by OPEC, and 60% of global oil supply is provided by Non-OPEC oil producers. Russia is a Non-OPEC oil producer but if we take Russia out of that category, we are left with 44% of global supply.

This sub-category, Non-OPEC ex Russia, is what I refer to as Free Market Oil. This is ExxonMobil (XOM), BP, Shell (RDS.A), Suncor (SU), and countries like Brazil, The United States, Norway, the UK, Mexico and Australia.

Most of this oil is extracted with the best technology, and with the help of Schlumberger (SLB), Baker-Hughes (BHI), Transocean (RIG), Weatherford (WFT), and National Oilwell Varco (NOV). You get the idea. So, let’s see how free market oil supply responded to the rise in price from 30.00 dollar oil to 150.00 dollar oil from late 2003 through the present (click to enlarge):

Free Market Oil has dropped by over 2 mbpd (million barrels per day) since December of 2003. If your professor or your local economist or perhaps national newspaper is still pounding the table that supply always makes a response to price–even in natural resources–you might want to send them a link to this chart.

Graphic: Non-OPEC ex Russia, by Gregor Macdonald at www.gregor.us

Comments

[58robbo:]

What an asinine depiction of free markets! for a start western oil supply is not free market. it is laced with subsidies. it doesn't help that price went down to $30 because of demand destruction. obviously physical limitations exist on oil, but supply does always respond to price just not in the way you think of it. i'd argue that when oil sat at $5 the market went looking for alternatives. that is to say that people started car pooling instead of going alone. people switched off the heat in their homes when it wasn't necessary, some people chose to walk, buy prius's, some invested in solar panels and electric vehicles. backyard inventors started coming up with all sorts of ideas. i personally know people in the garden maintenance business, who set up micro palm oil extrusion plants using the trimmings from the gardens they maintained. i'd give more examples but don't have the time right now.

Nov 02 04:03 AM

[Dave5577:]

Another indication of peak oil perhaps. Show a chart of their acquisition expense and exploration and development expenses over the same time period. And do not forget the long lead times to bring new oil to market...at times it can be 10 years or more with permits and the like.... Basically a chart that does not indicate what the author says it indicates.

Nov 02 04:15 AM

[redbaron:]

But what if the chart is showing a long term trend, and they are actuallying finding less oil? It is a certainty that price was not limiting production during this period of time. Indeed, if it was not price, what was it that resulted in lower production of oil in the free market world? We won't know for sure immediately, but what if peak oil has already happened? What then? So many of the pundits want to argue against this situation, but I think it is happening.

Nov 02 07:15 AM

[long_on_oil:]

I think the author is trying to show that the main oil supply comes from the Saudis and we better wake up to that fact. The fact that the Saudis can make up any shortage in the total oil supply and increase their strangle hold on us. We are not really talking econ 101 here but where the supply comes from.

Nov 02 08:19 AM

[bartpr:]

price does not hae to be analyzed to see where peak oil has occured.
july 2008 was it even when price did not peak yet. even with the severe downturn in the world economy demand dropped only 6%. how the price got down to $30 is beyond me. but i suspect it was the
dollar rally. just like now the dollar is down and oil is up. it does not appear to entirely depend on supply and demand but what the equivalent market price of oil is at some dollar reference value. what this is. who knows.

not liking to play the oil market because it is betting on the dollar.

Nov 02 08:36 AM

[change is t...:]

Gregor-

Fine article. Free market meaning non-cartel oil I would imagine. I would also imagine your point being if they COULD make more oil when the price was high they WOULD. Additionally, you have placed a wink to even with the best technology and know-how in the world maybe there is a current limit to non-cartel oil's ability to find more oil in friendly parts of the world. Finally maybe, a supply shock in the works sometime in the distant future. When? That's why so many bets are being placed now. Again, fine article.

Nov 02 08:46 AM

[Ferdinand E...:]

Makes all the sense in the world to me, especially that chart. Redbarron's comment is useful also. As for the first comment above, it belongs on some of the daytime soap-operas that are making fools of the American TV audiences.

Nov 02 08:47 AM

[ryanclarke:]

What the author has described above most certainly does not agree with Adam Smith's concept of capitalism ... which is why the U.S. economy is not based on capitalism.

Nov 02 08:49 AM

[swaps:]

That chart looks like declining non-Open oil production to me. T Boone Pickens has been saying for years the big oil pools are found. Sure, some more are popping up now in Brazil and elsewhere - but India and China are boosting demand.
I recently drove from Colorado to North Carolina and back. Prices at the pump seemed higher than in the summer. No winter price decline yet. Oh, I only buy he highest octane gas because that is better for my car's engine. I will not economize there.

Nov 02 08:53 AM

[The Greates...:]

Crude inventories are rising, gas inventories are rising, so why does the price at the pump keep going up?
Every American need’s to call, write, fax and email their representative ASAP and ask these same questions! Where will the world be when the oil industry has all the money? The current world depression will not heal as long as fuel cost continues to escalate. The cost of fuel is the corner stone of any recovery because it affects every aspect of the world’s economy. It is so simple, just get off oil and start keeping our $25 Billion a month that we spend on foreign oil here at home to rebuild our economy. Our government has way too much oil money in it and Congress needs term limits. Where is the investigation into the oil and gas industry?

Nov 02 08:59 AM

[Tony Petroski:]

I'm not sure what the proper response is. We are all doomed?

58robbo: You made some good points, but English writers, even those pressed for time, use "I" instead of an "i." Small matter i know, and i know you are busy.

Nov 02 09:11 AM

[MarkitWacha:]

cap-and-tax will disrupt and destroy most of the economy of the southern USA. It's like a modern day copy of the pre-civil war economy--yanks from the north dictating absurd policy to the hard workers in the south.

That's why gas prices are so high -- no new refineries can be built because of constraints from the EPA. Would YOU build a refinery at a cost of Billion$ for a 1% return on investment, along with constant threats from the EPA and litigious citizenry, and the threat that electric cars will destroy your profit after 5 years, turning it into a loss for the next 20 yrs?

Nov 02 09:23 AM

[bob the inv...:]

Peak oil does not matter.Most oil use could be replaced with natural gas,If you agree with that,Then you would look at the price of natural gas ,It is much cheaper then oil.Also you would want to look at who has the gas and cost to produce.The whole world has it and can produce from shale at about $40 a barrel.From none shale cheaper
Proof of natural gas usage
Look at Europe
% of new cars and trucks purchased with alternate fuels(large % natural gas
This is with out any subcity at all
Only difference is no tax on natural gas
So if the world does not tax natural gas it is a slam dunk
Where can you buy for a lot less?
Russia
Which stock ?
Gas prom$2 a barrel plus cost to get out and deliver

Nov 02 09:23 AM

[jerrydd:]

On Nov 02 09:23 AM MarkitWacha wrote:

> cap-and-tax will disrupt and destroy most of the economy of the southern
> USA. It's like a modern day copy of the pre-civil war economy--yanks
> from the north dictating absurd policy to the hard workers in the
> south.
>
> That's why gas prices are so high -- no new refineries can be built
> because of constraints from the EPA. Would YOU build a refinery
> at a cost of Billion$ for a 1% return on investment, along with constant
> threats from the EPA and litigious citizenry, and the threat that
> electric cars will destroy your profit after 5 years, turning it
> into a loss for the next 20 yrs?

Your post is so wrong it's not funny. Blow is a far better way and includes a fossil fuel tax and why.

We can have a stimulus that costs almost nothing to the taxpayer, in fact paid a lot by Iran, Russia, oil dictators!!

How is start up loans for RE companies and energy eff ones. Let most anyone with a good business plan through the SBA get start up loans to build or install windgenerators, solar CSP unit, CHP, small lightweight, aero 3 wheel EV's, etc. Then loans to buy, install, etc these.

Loans for home, building eff upgrades from windows, insulation, etc are next.

All these can be paid for in energy savings in 5 yrs so no new income costs either. This will create about 3 million jobs directly and probably 6 million indirectly of people supporting them.

Next is a fossil fuel tax to pay their full cost of the direct, indirect subsidies we already pay in our income tax, health care, etc. it's time those who make, benefit from those costs to pay them It should be a $1.50/gal on oil and about double the price of coal.

But you say a tax will kill the economy. Not if it's put in over 2 yrs each month and loans given to buy more eff cars, etc. Switching truck, semi's to NG is very cost effective now being under 50% of the cost of diesel/gasoline. The beauty of this is oil, coal will drop in price making Iran, Russia, oil dictators pay most of the oil tax, coal is only 25% of your electric bill so it won't go up much.

But new, more eff cars, trucks, EV's, PHEV's and mass transit will create more new jobs too.

The fossil fuel tax revenue, 1/3 would go to a tax cut so those people paying it have the extra money needed if they continue to use the same amount or better, use less and have extra income, the more likely outcome. 1/3 to to help switching to more eff cars, trucks, homes, buildings and 1/3 to balance the budget fossil fuels have been a large part in making.

So this program would have a net increase of about 8-10 million jobs of both direct and supporting those who have the new jobs, solve our imported oil problem, let us leave the Persian gulf between the 2 are about $1T/yr in a few yrs if we don't, stop subsidizing our enemies, oil corporations and balance the budget.. All at little cost to the gov, in fact get rid of our debt on our children and make our country strong again.

Or we will be broke, at war, our enemies strong and we will be weak. To me it's the only real patriotic way to go.

Nov 02 10:57 AM

[RLLH:]

It would be interesting to see a similar chart for cartel oil.

Nov 02 11:02 AM

[erewhonman:]

After reading the froth I went back to Gregor's terse presentation. The argument that increase in price does not always lead to an increase in supply - recent non-Opec, non-Russian oil being the example - is well engaged. Interesting is the array of soap boxes that were pulled out and shouted from in responding to this simple argument. Almost no one responded to the argument! There is no hope!

Nov 02 02:02 PM

[sako shooter:]

Removing Russia distorts the graph, rendering the question moot. Russia has surpassed Saudi Arabia as a producer of oil. Russian increase in supply did not allow room for others, OPEC or free. The other statistical oversight was the failure to mention that Angola joined OPEC in 2007, taking some 1.4m bpd out of the free column in 2007 and adding it to OPEC column and perhaps 2m bpd today out of the free column. What is the old saw about figures?

Nov 02 02:32 PM

[carbonates:]

Your premise that removing production of OPEC and Russia leaves only oil produced by market-based oil producers is probably wrong. Most of the majors produce in Russia and OPEC countries. BP's net in Russia is close to 1 million bbl/day. Shell's net production in Nigeria is about 850,000 bbl/day. Oxy's current net production is at least 400,000 bbl/day in OPEC countries. Total was producing 535,000 bbl/day from OPEC and Russia for 2008. Exxon is not transparent about its production per country, but has major projects both in OPEC countries and Russia. Chevron still has a major stake in Venezuela which has quadupled its income over the past 4 years suggesting Chevron production is rising there. Likewise Chevron is growing production in Algeria. While the overall trend in liquids production numbers is falling for many majors, this graph may more correctly represent a shift away from production towards OPEC and Russian locations more than a decline in overall production of multi-nationals and independents. I suspect you have oversimplified this chart to the point it does not represent the true picture.

I will also point out that considering only liquids production can be misleading since gas production is rising in most parts of the world. Through fuel substitution as well as gas-to-liquids projects, gas is slowly replacing liquids and will likely continue that trend.

Nov 02 07:49 PM

[Old Trader:]

long_on_oil,

I certainly wouldn't bet the farm on the fact (hope?) that the Saudis can make up any shortfalls on the supply side of the equation. Its been many years since there's been any sort of independent audit/evaluation of Saudi reserves. Everybody has been just taking them at their word.

For the poster(s) above who look to Russia, I'd suggest that Russian fields are still suffering from decades of mismanagement, and underinvestment. They need the expertise and capital provided by the major oil companies to get things rolling in the right direction again and the games the Putin regime has been playing don't help matters any....


On Nov 02 08:19 AM long_on_oil wrote:

> I think the author is trying to show that the main oil supply comes
> from the Saudis and we better wake up to that fact. The fact that
> the Saudis can make up any shortage in the total oil supply and increase
> their strangle hold on us. We are not really talking econ 101 here
> but where the supply comes from.

Nov 02 09:41 PM

[E.D. Hart:]

Saudi fields will likely peak in 2015. Even the Saudis have limited capacity after having pushed their filed too far too fast with saltwater injection methods.

Nov 03 03:17 AM

[William Dav...:]

Well I think your wrong it covers 6 years and we should of seen some demand response in that time. Yes it can take 10 years to bring on new fields, but your ignoring the fact that higher prices extend the fields life and increase the oil recovered. Many North Sea oil fields have had their projected life extended considerably in the last few years but its not stopped the decline. The message from the North Sea is clear. Its got the best data, the most advance technology, its capital intensive, has good local infrastructure, is political stable and even the Tax regime is fairly good.

Your clutching at straws. See the chart www.theoildrum.com/upl...

On Nov 02 04:15 AM Dave5577 wrote:

> Another indication of peak oil perhaps. Show a chart of their acquisition
> expense and exploration and development expenses over the same time
> period. And do not forget the long lead times to bring new oil to
> market...at times it can be 10 years or more with permits and the
> like.... Basically a chart that does not indicate what the author
> says it indicates.

Nov 03 07:42 AM

[Ermilo:]

Number 1: The government CAN NOT SOLVE ALL YOUR PROBLEMS.

Number 2: If you are so upset about this....DO SOMETHING. Start your own green business, short the market, long the market. Quite crying about it and do something about it.

Number 3: Turn off CNBC and do your own darn research!
On Nov 02 08:59 AM The Greatest Rip Off of our Time wrote:

> Crude inventories are rising, gas inventories are rising, so why
> does the price at the pump keep going up?
> Every American need’s to call, write, fax and email their representative
> ASAP and ask these same questions! Where will the world be when
> the oil industry has all the money? The current world depression
> will not heal as long as fuel cost continues to escalate. The cost
> of fuel is the corner stone of any recovery because it affects every
> aspect of the world’s economy. It is so simple, just get off oil
> and start keeping our $25 Billion a month that we spend on foreign
> oil here at home to rebuild our economy. Our government has way too
> much oil money in it and Congress needs term limits. Where is the
> investigation into the oil and gas industry?

Nov 03 03:51 PM