The Covid-induced demand shock and a shifting momentum towards investment in clean energy are set to slow the expansion of the world’s oil production capacity over our six-year forecast period. At the same time, the historic collapse in demand in 2020 resulted in a record 9 mb/d spare production capacity cushion that would be enough to keep global markets comfortable at least for the next several years.

Against this backdrop, it is hardly surprising that upstream investments and expansion plans have been scaled back. In 2020, operators spent one-third less than planned at the start of the year (and 30% less than in 2019). In 2021, total upstream investment is expected to rise only marginally.

Those sharp spending cuts and project delays are already constraining supply growth across the globe, with world oil production capacity now set to increase by 5 mb/d by 2026. In the absence of stronger policy action, global oil production would need to rise 10.2 mb/d by 2026 to meet the expected rebound in demand.

Producers from the Middle East are expected to provide half of the increase, largely from existing shut-in capacity. If Iran remains under sanctions, keeping the world oil market in balance may require Saudi Arabia, Iraq, the UAE and Kuwait – with their surplus capacity – to pump at or near record highs.

That marks a dramatic change from recent years when the United States dominated world supply growth. In the current policy environment, US production growth is set to resume as investment and activity levels pick up in tandem with rising prices. Yet any increase is unlikely to match the lofty levels of the recent past. The outlook for the tight oil industry has been tempered by an apparent shift in the business model towards spending discipline, free cash flow generation, deleveraging and cash returns for investors.

The global market still looks adequately supplied through much of the medium term. But in the absence of fresh upstream investments, the spare capacity cushion will slowly erode. By 2026, global effective spare production capacity (excluding Iran) could fall to 2.4 mb/d, its lowest level since 2016.