Persistent claims of chronic underinvestment in the global oil and gas industry are overblown, Rystad Energy research and analysis shows. Investments in the upstream sector have tumbled since spending peaked at $887 billion in 2014, with about $580 billion expected to be invested this year. The number of completed wells has also fallen, from 88,000 in 2014 to 59,000 this year.

As a result, many market participants predict that this trend will continue and lead to chronic underinvestment and an oil supply shortage in the coming years. However, our modeling and analysis tell a different story. Lower unit prices, efficiency gains, productivity gains, and evolving portfolio strategies have significantly increased the upstream industry’s efficiency. In other words: the industry can do the same as before, but at a much lower cost. Although investments have shrunk, activity and production remain healthy and on par with the levels seen from 2010 to 2014.

“Contrary to popular opinion, the world is investing appropriate amounts of money in fossil fuel production to satisfy demand. Cost savings mean operators can produce the same amount of oil at a lower cost, and we don’t foresee an oil supply crisis due to underinvestment on the immediate horizon,” says Espen Erlingsen, head of upstream research at Rystad Energy.

Global upstream investments peaked at almost $900 billion in 2014 before falling to around $500 billion two years later after the oil-price collapse in 2015. There was another drop in 2020 as investments slumped to $400 billion due to the Covid-19 pandemic and consequent oil-price crash. Spending recovered last year to around $500 billion as oil and gas activity bounced back. Despite this rebound, 2022 investments reached only 60% of 2014 levels, so it could be easy to assume that upstream activity has declined 40% since 2014.

However, this conclusion is hasty and fails to consider falling unit prices and efficiency gains. By looking at how unit prices for different supply segments have developed since 2014, we see how costs have fallen. The unit prices are related to when the spending occurs and not when it is contracted. For most segments, prices have come down by 20% to 30%, resulting in more activity for every dollar spent. Therefore, it would be misleading to only look at the falling investment trend.

The number of completed wells per year is also a key metric. Activity peaked around 2014 with about 88,000 new wells drilled. As with investment levels, the number of wells fell from 2014 to 2016, then grew until 2019 before dropping during the pandemic. Last year, the number of new wells was around 55,000, a decrease of about 35% versus 2014. This metric also seems to tell the same story: activity levels are considerably lower than in 2014.

To paint a more accurate picture of upstream activity, Rystad Energy evaluates the expected resources from the wells across their lifetime, about 30 years. This metric excludes the impact of cost inflation or deflation, and includes efficiency gains and portfolio changes, as we have observed recently with drilling moving to areas with more productive wells. The wells completed in 2014 have a total oil production potential of around 37 billion barrels. This was a year of overinvestment, and a sharp drop in oil prices followed in the proceeding years. From 2014 to 2016, developed resources dropped but much more slowly than investments and well counts, showing that the most productive wells were still drilled during this period.

The oil resource potential for all the wells completed in 2022 was almost 32 billion barrels, or just 15% lower than in 2014. For 2023, this value is expected to grow further and reach nearly 35 billion barrels. The recent growth in developed resources is driven mainly by US tight oil and deepwater fields.

The total resources by completion year can then be compared to total annual production to show the trajectory and sentiment of the market. In an expanding oil market with growing demand, newly developed resources should outweigh total production as the volumes from new wells will be produced across a 30-year period. New resources will exceed total production annually until at least 2025, demonstrating the positive trajectory of the global oil industry and supporting our conclusion that an underinvestment-triggered supply shortage is unlikely in the short term.