An excellent piece of analysis from Econbrowser reminds us why oil production forecasts should be taken with a grain of salt.
Exxon Mobil (XOM), is currently producing just over 2.4 million barrels per day, despite in the past having forecast much higher levels of production on many occasions.
As shown below, the company forecast healthily rising production back in 2001, then even revised these expectations in 2006 when the 2001 view didn’t pan out. Yet Exxon is below 2006 growth forecasts, having actually seen production decline.
Econbrowser concludes that Exxon may have been too cautious with its past investment decisions, or lack there of. In retrospect, the company may have required unrealistically low oil price assumptions when it calculated whether a project was worthwhile or not.
Econbrowser: The Wall Street Journal reported on Wednesday that ExxonMobil is prepared to spend $4 billion to buy 1/4 interest in the Jubilee oil field off the coast of Ghana, which would represent 15% of the oil giant’s 2008 capital and exploration budget. Alan von Altendorf thinks they can’t make a good return unless they sell the oil for $100/barrel. Presumably the company is reckoning on more oil in the field than current estimates suggest. But even if von Altendorf’s calculations are off by a factor of two, it still seems to signal a change in philosophy for a company that has historically been extremely careful with its investments in order to maintain its position as a very low-cost producer.
This investment could thus be a strong confirmation from the industry that new oil production will simply cost far more than it used to, and will require far higher oil prices to break-even well into the future. This would obviously be positive for future oil prices.
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