Why oil booms and busts happen

(Source: CIBC) URL: http://cdn.oilprice.com/images/tinymce/2016/Pushinghard2.jpg

Between the years 2000 and 2005 OPEC increased its crude and NGL production by 4 million barrels per day, inching up total production from 30.7 million to 34.8 million barrels, however this was insufficient to meet the over 7 million barrels per day growth in global demand growth during this period, with OPEC excess capacity virtually eliminated, the additional increase in supply had to come from non-OPEC sources.

However, after rising from 46 million bpd to 49 million bpd (all liquids) from 2000 to 2004; non-OPEC supply stalled at around 49 million bpd for 3 years from 2004 to 2006, before finally crossing into the 50 million bpd mark in 2007. The pressure on non-OPEC to increase production could only translate into a sizable increase in prices, which in turn encouraged the industry to significantly increase its capex spending.

(Source: IMF) URL: http://cdn.oilprice.com/images/tinymce/2016/Pushinghard3.jpg

World supply hits a wall ... U.S. supply to the rescue

Yet, as prices exploded higher and capex spending hit record after record, something curious happened: Non-OPEC all liquids supply (ex-U.S.) ground almost to a halt, after crossing 43.4 million bpd barrels in 2007, non-OPEC (ex-U.S.) all liquids supply increased by a measly 1.5 million bpd over a 7 years period, a period during which demand increased by over 6.6 million bpd.

As a matter of fact, between 2010 and 2014 non-OPEC (ex-U.S.) supply did not grow at all as it averaged around 44.5 million bpd for five years, while demand increased by 4.1 million bpd during this time. OPEC did marginally better than non-OPEC supply (ex-U.S.), OPEC production stagnated at 34.6 million bpd from 2007 to 2010, before increasing to 36.6 million bpd by 2014, or increasing by 2 million bpd from 2007 to 2014 (OPEC did cut supply in late 2008 and 2009 in response to the financial crises).

Powered by the shale revolution, U.S. supply was a different story, from 2010 to 2014 U.S. all liquids supply grew by 4.2 million bpd, thus meeting the totality of global demand growth in the 5 years preceding the current crisis. Eventually, the strong increase in shale production combined with the resumption of growth in OPEC production led to prices collapsing by late 2014.

(Click to enlarge) (Source: Semper Augustus Capital) URL: http://cdn.oilprice.com/images/tinymce/2016/Pushinghard4SMAL.jpg