An Appraisal of the Global Petroleum Upstream Industry and Its Response to Changes in Crude Oil Prices

Abstract

This paper presents an appraisal of the global upstream petroleum industry and its responsiveness to changes in crude oil prices from 1980–2006. Temporal and spatial analysis of E&P operational performance indicators suggests that the current estimated worldwide remaining reserves can sustain current worldwide production rate for at least the next four decades, ceteris paribus. Further, the study shows that for every one dollar drop in real crude oil price, 64 drilling rigs were disengaged, on average, from drilling activity globally from 1980–1989; and 50 of these 64 were disengaged in North America. Further, for every one dollar rise in real oil prices from 1999–2006, 24 and 29 new rigs were engaged in North America and worldwide, respectively. The study shows that global exploration activity responds asymmetrically to rising and declining real oil prices from 1980–2006. The study also shows that the impact of oil prices on global production has significant spatial and intertemporal differences as well. Introduction There are basically two schools of thought on the state of global petroleum supply outlook. The pessimists' school of thought contends that the question regarding world petroleum supply is not whether world oil production will decline, but when will the declining trends usher in the permanent world oil shock era? Those who belong to the second school of thought, however, are more optimistic. The consensus among them is that "the world is not running out of oil but into it." The optimists affirm there is strong evidence to suggest a growing abundance of petroleum resources worldwide. They suggest that the pessimists' concerns for imminent petroleum resource exhaustion are unwarranted. Iledare and Pulsipher develops and uses selected indicators of operational performance of the upstream petroleum industry to empirically test the hypothesis of an imminent exhaustion of world petroleum resources. The authors conclude that "the outlook for global oil supply from non-OPEC sources is not bright, but that in itself does not imply an inevitable end to an oil era." This paper reviews and analyzes selected global E&P activity and petroleum resource development indicators.