Can the world avoid a global oil supply contraction?

• As spare capacity continues to dwindle and reserve replacement rates decline, the world could soon face severe oil supply shortages

• In 2021, the number of new oil and gas deposits found is likely to reach its lowest level in 75 years, highlighting a major issue for future production

• ESG (environmental, social and governance) investment boom and aggressive investors pulling money out of the oil industry could make the energy transition more difficult and costly

There's a reason the European gas crisis has been in the headlines for months – the continent is still struggling to ensure enough energy to meet its winter needs
, according to the Oil Price Network on January 12.
But the world could face a more serious crisis, and that is the oil crisis
.
These signs are visible to all: OPEC is dwindling spare capacity, newly discovered oil and gas resources are at historic lows, and banks are increasingly reluctant to participate in the oil and gas industry
due to the rise of ESG investment.
At the same time, large oil companies are constraining production
while focusing on developing low-carbon businesses.

Capacity crisis?

The International Energy Agency (IEA) said in its October 2021 oil market report: "The shrinking global spare capacity highlights the need to increase investment to meet future demand
.
"As OPEC ramps, its spare capacity will drop sharply as it increases production under its return to normal agreement, likely to reach only 4 million bpd
by the fourth quarter of this year.
" That would be more
than half down from 9 million bpd in early 2021.

Spare capacity is an important indicator
of production flexibility in the oil industry.
The IEA defines it as production that can be started within 90 days and last for a longer period of time
.
The U.
S.
Department of Energy defines idle capacity as capacity that can be mined in 30 days and last for 90 days
.
According to the U.
S.
Energy Information Administration (EIA), OPEC's spare capacity could drop to 5.
11 million bpd
by the end of the year.

The IEA doesn't seem to be sure what it wants — whether to invest more in oil or in renewable energy
.
It called for both
on various occasions last year.
But judging from the trend of oil prices, although OPEC plans to shift to low-carbon energy sources, its shrinking spare capacity is indeed worrying
.

Further exacerbating this concern is that some OPEC+ members are approaching the limits of their spare capacity, and Russia is one of
them.
One of the world's largest oil producers has reportedly found it difficult for oil production to return to pre-pandemic levels
while other OPEC+ members are all grappling with the same problem.
This means that even if demand continues to grow at the current steady rate, supply may not catch up
.

Urgent need: new reservoirs

Norwegian energy consultancy said in a December report that newly discovered oil and gas resources may have fallen to their lowest level
in 75 years.
The total newly discovered resource last year was about 4.
7 billion barrels of oil equivalent, down from the 12.
5 billion barrel oil equivalent found in the first year of the epidemic
.

At the same time, under pressure from shareholders, activists and governments, European oil giants are deliberately reducing oil production in line with a strategy
to move toward renewable energy.
So, on the one hand, we spend less money on new supplies, and on the other hand, we intentionally reduce existing supplies
.

Low discovery levels mean that the rate of reserve replacement has also declined, and the low rate of reserve replacement in the oil and gas industry is bad news
for future supply.
Saudi Arabia warned last year that underinvestment in new oil production could lead to an energy crisis, but the warning did not receive much attention
because everyone expected Saudi Arabia to say such a thing.
Even so, increasing the rate of new oil discoveries is not as easy as it used to be
.

Banks are keen on ESG investing

The rise of ESG investors has caused quite a stir
in the financial industry.
Returns remain a priority, but it's no longer the only final priority
.
Today, investors want to know that their money is being used responsibly for the benefit of the planet
.
That means they are increasingly reluctant to see that money flow to the oil industry
.

As a result of this trend, banks and asset managers are rethinking their business strategies
.
Asset managers are asking customers to make commitments to reduce emissions or they will abandon them
.
Banks refuse to lend to the oil industry and threaten to abandon customers
who produce large amounts of carbon dioxide emissions.

It's not just pressure from shareholders that guides the bank's actions
.
Regulators are also stepping up pressure on banks to conduct new risk assessments based on climate change scenarios and tighten capital requirements
accordingly.
To avoid being shackled by regulatory regulations, banks are reducing their exposure
to the oil and gas industry.

Meanwhile, oil demand appears to be as healthy as ever, with oil price forecasts showing strong upside potential
.
Those who are bearish on oil on the grounds of the energy transition seem to forget that it will take much more than a few years
.

As Tom Kloza of the oil price information service wrote in an opinion piece for CNN, it will also be tough
.

"Once we really start moving away from fossil fuels, the price will be expensive and painful
.
" Deniing these costs is as hypocritical as denying climate change," Kloza wrote
.
This argument and the fact that we will continue to need large amounts of oil in an observable future is an indisputable fact
.