Shell CEO Wael Sawan sees oil prices heading structurally higher in the future. And I agree with him.
The Wall Street Journal emphasized this line from Mr. Sawan: “All the easy oil and gas has been found.”
There’s truth to that.
But there’s more to it, as he explains in his extended remarks.
Fundamentally, the growth in energy demand is racing ahead of the growth in energy supply.
Oil & gas still supplies around 60% of the world’s total energy.
And oil producers have pulled their exploration spend way back over the past 10 to 15 years.
But oil demand isn’t going away. It continues to grow.
The US-Iran War brought an acute supply shortage that highlighted a longer-term reality that was already underway.
Because the world is not turning away from oil the way some analysts expected at the start of this decade, we’re now in a place where we can’t bring enough oil production online quickly enough to satisfy new demand in the medium term.
Add the near-term outages and infrastructure damage we just suffered, and we’re even further behind than we were at the start of the year.
I had lunch with an E&P executive the other day, and we talked a bit about the structural rise in the component costs for well construction.
Commodities like steel and cement aren’t getting cheaper, particularly with construction activity on the rise generally.
It’s not going to get any easier to get power to the wellsite.
Labor costs are going up, and AI isn’t yet unlocking the wholesale savings required to push down breakeven oil prices.
Put it all together, and you get a recipe for rising oil prices, which was Mr. Sawan’s point.
The open question will be whether oil prices reset at a high enough level to destroy demand at the margin.
And if so, where does that incremental demand go instead?
Answers to those questions are driving much of the capital allocation exercise that’s taking place across the world’s energy and industrial sectors.
