INTERNATIONAL. A research paper out today from Merrill Lynch says the combination of low oil prices and a global credit crunch will prove rather damaging for the oil industry. Its analysis based on the IEA Field by Field Production database finds decline rates at an average of 4.2% per annum since 2003.
Extrapolating from this sample to create a global production profile, the bank believes the global decline rate has averaged at least 4.5% year on year in recent years. These rates, however, could accelerate further over the next few years, according to Francisco Blanch, Head of Global Commodities Research and lead author of the report. Furthermore non-OPEC crude oil production may have already peaked.
Broadly, oil production decline rates are a function of investment rates and the size and age of fields. All these factors point to steeper oil output declines going forward. However, the IEA works under the assumption of oil production decline rates of 4.7% to 2015, expecting an increase in non-OPEC output to 51 million bpd over the next seven years.
In contrast, in Merrill's base case scenario it estimates output decline rates of 5%, and it sees non-OPEC oil production stuck in the current 49 to 50 million bpd range in the same period. Should the credit crunch push decline rates to 6%, however, non-OPEC production could decline precipitously towards 47 million bpd by 2015 from the current levels. The commodity super-cycle is not over, just resting.
In summary, assuming the ongoing recession does not turn into a multi-year event where global oil demand is pushed down structurally for the next five years, the steep decline rates in OPEC and non-OPEC countries alike could put upward pressure again on oil prices as soon as 2010 or 2011.
In particular, if the low oil price, high cost of money environment persists for most of this year and next, Merrill's base case scenario for non-OPEC production could prove optimistic, exacerbating the second leg of the commodity super-cycle.