Quenching the world’s growing thirst for oil

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: fact that ‘easy oil’ has been found and that future discoveries are likely to be in harsh and inhospitable environments. Today, the oil industry is spending substantial sums of money and using state-of-the-art technology to find new oil in areas like the Arctic and ultra-deep waters. This quest is further hampered by the lack of resources, particularly in oil field services, deepwater drilling rigs and even skilled manpower.

The decline in production, though, is not evident from global oil production figures, which went up by 9% in the last five years (up to year 2006) at a compounded annual growth rate (CAGR) of 1.7%. But this increase is largely attributable to former Soviet Union countries, which had a robust 41% growth with a CAGR of more than 7%. Compare this with the production decline of 9% in OECD countries and more alarming 27% decline of EU-25 countries over the same period. Some major producers like the US, Norway, Venezuela and UK all registered declines ranging from 10% to 34% during the same period.

For how long can the former Soviet Union countries and Opec bail the globe out? Not for long. Major oil fields worldwide are registering a declining trend. In a recent study of more than 800 oil fields, Cera concluded that the “aggregate global decline rate of the oil fields is 4.5%, rather than the 8% cited in many studies”.

Even this lower decline rate is hardly comforting. These ominous signs have neither dampened the demand for oil nor impacted its prices that continue to chart a three-figure trajectory with each passing day. In fact, oil prices have risen a whopping 1,000% since December 1998 and by 300% from December 2003, the last time when it ruled below $30/ barrel (WTI spot prices).

The unfolding oil story suggests that prices are increasingly becoming divorced from market fundame-ntals. Though the traditional fundamentals of demand and supply continue to hold good, a few new factors appear to be driving current record highs.

Today, the weak dollar is just as important as the slim supply cushion and rising demand for oil in determining oil prices. The dollar fell 20% against the euro from March 21, 2007 (the last time oil reigned in $50s) to April 22, 2008. Showing a marked negative correlation, crude prices rose by 109% during the same period.