Oil prices are up today, another apparent notch in the belt of conventional wisdom, which is that we are on the way to another historic price spike -- $200 to $300 a barrel and $5 a gallon at the U.S. pump. The way this narrative goes is that these sky-high prices finally so aggravate U.S. consumers that they act on them: switching for good to hybrids and other high-mileage cars, weather-protecting their homes and buildings, and generally using much, much less oil. On the other side of all this, a decade or a bit more from now, we get a long, slow decline in global oil demand, paradise, and other fine things.
But is this valid? Not necessarily, if one considers a pair of reports out today from Barclays Capital, the research arm of the investment bank. Start with what leads people to such conclusions. First is the theory of peak oil: the evidence that we've just about reached the apex of our capacity to produce oil, and will be on a supply plateau of around 90 million barrels of oil a day for some time before the supply begins declining (global oil demand is about 85 million barrels a day). The other factor is that oil companies have in recent years curtailed their spending to find new oilfields. Together, these trends suggest that supply will stop keeping up with demand about mid-decade.
Where Barclays takes the punch away from this pessimists' party is a semi-annual survey of 402 oil and gas companies of all sizes around the world. Barclays finds that these drillers are back in the spending game. In what Barclays calls "The Original E&P Spending Survey" (sounds like a cheeseburger ad, right?), it finds that exploration and production spending is going to rise next year to almost half a trillion dollars. In precise numbers, that means $490 billion in spending, 11 percent higher than the measly $442 billion that will have been spent by the end of 2010.
Actually, neither year's figure seems like meager spending. As you can see in the handy chart below from one of the reports, the biggest dudes on the block -- the supermajors, who can drill anywhere -- will lead the charge with a 17 percent spending increase on international projects. As you can see, BP is going to spend 36 percent more next year. As we discussed last week, Chevron is now going to be neck-and-neck with perennial spending leader Exxon Mobil.
Source: Barclays Capital estimates
Barclays attributes the spending binge to the companies' own projection of higher oil prices next year -- they are figuring in a price of $77.32 a barrel on average in 2011 compared with an assumption of $70.16 this year. Barclays itself thinks that prices are going to be much higher next year, an average of $85 a barrel, and perhaps touching $100 a barrel at times, according to Reuters.
There is a space of many years between the start of drilling and actual production. But some of this spending involves new drilling at existing fields around the world, making one wonder whether the mid-decade production slump will truly materialize.
Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.