More than 200 discoveries have been reported so far this year in dozens of countries, including northern Iraq’s Kurdish region, Australia, Israel, Iran, Brazil, Norway, Ghana, Sierra Leone and Russia. They have been made by international giants, like Exxon Mobil, but also by industry minnows, like Tullow Oil according to the New York Times.
These discoveries, spanning five continents, are the result of hefty investments that began earlier in the decade when oil prices rose, and of new technologies that allow explorers to drill at greater depths and break tougher rocks.
Why is this happening?
Demand and supply. Since the beginning of this decade oil prices have more than quadrupled, going from $23 per barrel in 2001 to $91 per barrel on average by 2008. Significant increases in international trade, capital flows and a booming global economy meant that demand for oil outstripped supply. It has been estimated that 20 million Indians rose out of destitution in the last decade and more than a million Chinese per month rose out of poverty. This expansion especially in India and China caught everyone by surprise. Also bear in mind that African countries were also growing at an average rate of 6%. This is in addition to increases in global economic activity like manufacturing, farming etc. for which crude oil is the major input.
Usually when demand exceeds supply for any product the price goes up. A higher oil price is an incentive for investors and oil companies (producers) to find new sources for oil and make it available to the market. When oil peaked at $147 per barrel in 2008 a lot of people thought that oil was running out, others thought that the oil companies were price gouging. These popular but false theories were also propagated by the media unfortunately.
To say that the world is running out of oil because of high prices is like saying that the world is running out of computers or even textiles because their price went up. Gold is currently around $1,100 an ounce and is anticipated to reach $3,000 soon due to an increase in global demand primarily driven by a weak dollar. Does that mean that the world is running out of gold?
A shortage causes a price spike but does not imply complete exhaustion. This spike in price is a signal to producers to reallocate resources for oil exploration to close the supply gap. After supply increases the price of the product in this case oil will come down.
For instance a cassava farmer somewhere in eastern Nigeria plants and harvests 50,000 tons in October, 2009. Unbeknownst to him a pest attack obliterated cassava harvest in neighboring Cameroon. This spikes demand to 100,000 tons because people from neighboring Cameroon will come to eastern Nigeria to buy Cassava. As a result his harvest of 50,000 tones which usually meets demand is exhausted. What the farmer who is the supplier will do is go back and increase production. This means he has to invest more money to increase the size of the land, increase farming inputs like pesticides and fertilizer, hire more hands for labor etc. This means that the price of cassava must go up in the short term to pay for this expansion. By the next harvest season in 2010, cassava output will double to accommodate increased demand from Cameroon and prices will come down. This is exactly what happened to the oil industry.
The industry did not anticipate the increased demand for oil due to greater prosperity in India and China amongst others. So that when oil prices increased those profits went into oil exploration across the globe to meet increased demand.
Just as people tend to buy more at a lower price and less at a higher price, producers tend to supply more at a higher price and less at a lower price. This is the basic principle of economics and the global oil market is not exempt from this fact.
James T. Hackett chairman and chief executive of Anadarko petroleum sums this up perfectly.
“That’s the wonderful thing about price signals in a free market — it puts people in a better position to take more exploration risk”
