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"The Oil Crash: Why I Was Right"


October 21, 2014

Author: Leonardo Maugeri, Senior Fellow, Geopolitics of Energy Project

Belfer Center Programs or Projects: Geopolitics of Energy Project


In my 2012 study “Oil, the Next Revolution” [1], I stressed something that no one was seeing at that time (and much later as well). As summed up by the opening sentence of the study:

“Contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption. This could lead to a glut of overproduction and a steep dip in oil prices.” [2]

In the study, I summed up my forecast of the potential growth of oil production capacity to 2020 in Fig.1, which is reported below:

Fig. 1 – World Oil Production Capacity to 2020

I also suggested that an oil price collapse could alter my forecast, depending on the actual timing of such a collapse: In this framework, I considered 2015 as crucial for the oil market. This is because:

“Most of the projects I studied are still being developed, with higher initial costs to adopt new technologies, build infrastructure, and overcome the learning curve. The downturn or collapse of the oil market would have a significant impact, particularly if it occurred before 2015, when most of these projects have yet to advance. However, the duration and effect of such a collapse would probably be of short duration.” [3]


“…if an oil price collapse were to occur after 2015, a prolonged phase of overproduction could take place, because production capacity would have already accumulated and production costs would have decreased as expected. This is what happened to shale gas production in the United States between 2011 and 2012. In this case, market recovery will depend critically on the strength of the world economy as well as geopolitical factors affecting the steady flow of oil on the global market.” [4]

I reiterated my views in a series of articles by observing that the first crucial test for oil price resistance could occur in the second half of 2014, due to the continuous growth of production capacity versus sluggish demand, and in spite of geopolitical tensions affecting the world. [5]

In 2012 I was alone in forecasting such a gloomy scenario (or rosy, depending on the point of view) for oil, and my observations – based on a bottom-up analysis of world oilfields and oil investments, not on econometric models – were regarded at best as ‘controversial’ by the vast majority of the analysts in the sector and by the oil industry itself – both envisioning very different outcomes. Until recently, on the other hand, all the major forecasting agencies and institutes were anticipating bullish price and demand scenarios.

Still, my forecasts are punctually coming true, and the reality is – as it was – clear.

After a cycle of strong investments in oil and gas exploration and development started in 2003, since 2010 an investment super-cycle took shape: over a four years, national and international oil companies spent more than 2,500 billion dollars just in the ‘upstream’ hydrocarbons sector (oil and gas exploration and production).

That was an absolute historical record for the sector, even in the presence of a specific inflationary pressure which more than doubled upstream costs in the course of a decade. Much of that investment has produced, or will produce, results with a considerable time-lag, since in the oil industry it takes years to bring a given field to production.

The result is that new production capacity, or simple resilient capacity from mature fields, is progressively made available just while oil demand remains weak due to a still gloomy economic outlook – and will continue to do so. Other factors contribute to worsen the situation.

Thanks above all to the revolution in shale and tight oil fields production, Unites States is currently producing over 4 million barrels per day (mbd) more with respect to 2008, and is threatening Russia’s and Saudi Arabia’s positions as world leading oil producers. It is indispensable to clarify this point, due to the confusion created by official statistics and the media.

Saudi Arabia still holds the first place as far as oil production capacity is concerned, at about 12.5 mbd. However, to avoid flooding the world with oil, the Kingdom maintains a spare capacity of about 3 mbd. As a consequence, its actual production is lower than Russia’s (10.6 mbd), and higher than the United States’ (9 mbd as of October 2014). The US, however, is producing over 1 mbd of biofuels – included (together with natural gas liquids, or NGLs) in the oil production statistics provided by the all major agencies. Adding these elements, and taking into account the fact that the US is producing all it is capable of, in the last few weeks America actually reached the top in the world “broadened” oil production ranking – at least for some days. But that’s not all.

US oil consumption is now 2 mbd lower with respect to its peak (reached in 2007) – partly as the result of the adoption of new laws on energy efficiency and structural changes in consumer behavior. The combined effect of a greater production and a lower consumption is that US is currently importing over 5 mbd less than a few years back (and exporting a greater amount of oil products), thereby endangering the interests of many large and medium oil producers – once big exporters and now compelled to find new markets for their crude in a context of oversupply.

There are four main reasons which explain analysts’ inability to understand what was (and is) going on:

  • Undervaluation of global oil production capacity versus excessive focus on actual production – which does not include voluntary or involuntary spare capacity.
  • General tendency to view decline rates of existing oilfields simply as a function  of time – without taking into account the effects of different investment/technology cycles.
  • Constant, wrong view of both the actual costs and the evolution of productivity of US shale and tight fields (this is true, however, also for shale gas-fields).
  • Excessive reliance on forecasting the future on the basis of models that do not grasp the effects of both specific investment cycles and advancement in knowledge and technology.

I’m working on a new short paper to address in more details these four aspects. In any case, as I mentioned at the beginning, the overall effect of the factors outlined is that global oil production capacity has been growing too rapidly – and still does: It has already exceeded 100 mbd (including biofuels and natural gas liquids), whereas demand is hovering around 92-93 mbd.

In the last weeks of September, actual oil production has outpaced the 95 mbd mark, leading to stockpiling (around 2 mbd) and leaving over 5 mbd of spare capacity. Only Saudi Arabia maintains a voluntary spare capacity; other countries do not supply all the oil they could due to political instability (Libya and Nigeria – but also Iraq, Sudan and several others) or international sanctions (Iran). If their crude and NGLs were available on the market, oil prices would have already collapsed.

The final element contributing to paint a black picture for oil producers – either countries or companies – is the strengthening of the US Dollar, which increases the producers’ spending power and discourages investments in oil futures.

Facing all of this, even the explosive geopolitical tensions across the Middle East or at the Russian borders seem no longer enough to support oil prices: This was the case for a long time, but now only some new large-scale geopolitical crisis – like an attack by fundamentalists on a great producer or an effective ban on much of Russian exports – could likely have this effect.

There are also other factors that might put a floor and even cause a bounce-back of oil prices, such as a generalized cut in investments by oil companies or a decisive action by the Organization of Petroleum Exporting Countries (Opec) in terms of oil supply cuts.

The former factor calls into question not only the issue of actual break-even costs of many global projects but also other, less considered factors. In its turn, the Opec issue requires a deep understanding of how the current relations among the Organization members stand.

I have a view on both elements, but it requires a few more pages do deal with. As a consequence, it would be the topic of another newsletter over the next few weeks.


[1] Maugeri, Leonardo. “Oil, the Next Revolution. The Unprecedented Upsurge of Oil Production Capacity and What It Means for the World.” Discussion Paper #2012-10. Belfer Center for Science and International Affairs, John. F. Kennedy School of Government, Harvard University, 2012. At:

[2] Ibidem

[3] Ibidem. The study continued by observing that: “A sudden dip below $50 would not necessarily suspend the development of many projects worldwide, but would only slow their execution. The exception would be those projects that hold the highest marginal costs, such as some Canadian tar sands projects, Venezuelan extra-heavy oils, Brazilian pre-salt formations, as well as those projects that can be stopped immediately, such as U.S. shale/tight oil ones those of OPEC producers, whose execution depends on the will of governments.

Such a response from oil companies and governments would soon curtail new production, leaving the world market vulnerable to sudden disruptions by geopolitical factors or major accidents once again. Furthermore, market instability would likely coincide with a rebound of oil demand, driven by lower prices. Market forces should then realign prices with the higher marginal production costs in less than two years.

[4] Ibidem

[5] See, in particular: “La Fed fa bene al prezzo del greggio. Ecco perché ci sono le condizioni per la fine del superciclo dell’oro nero.” (Fed action is good for the price of oil. That’s why there are the conditions for the end of black gold supercycle) In: Il Sole 24-ore, December 24, 2013. At: See also: “Frack to the Future.” In: The National Interest, March-April 2014. At:


For more information about this publication please contact the Belfer Center Communications Office at 617-495-9858.

For Academic Citation:

Maugeri, Leonardo. The Oil Crash: Why I Was Right. Harvard University, October 21, 2014.

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