The yearly World Oil Outlook report from OPEC was recently issued, hinting at the prospects for the energy industry and the oil market in particular for a time period of 25 years into the future. In the report, OPEC reveals its expectations for the return of oil prices back to at least US$70 by 2020 and US$95 by 2040.
A brief recap of how oil prices have plummeted to more than half would have to include the higher-cost US shale oil producers joining the market this year and OPEC unwilling to give up its market share, flooding the market with an abundance of oil and lowering the price per the theory of supply and demand.
This market-share war plan worked for OPEC as it retains its share of the global market and the dismal oil price has deterred most investments into this industry. Hundreds of billions of dollars of planned new production have been abandoned and more than a trillion dollars of market capitalization was lost, preventing the entrance of more competitors.
“The market instability has led to a number of projects being deferred or cancelled altogether, rig counts falling dramatically, costs being squeezed and redundancies being made. And the supply and demand balance in 2015 has been one of oversupply, with stock levels rising to well above the five-year average,” says OPEC’s Secretary-General Abdalla Salem Al Badri in the introductory paragraph of the report.
And this dire situation of oversupply will not be resolved shortly in the near future, not with OPEC committed to maintaining production despite the nose-diving prices.
“Slow Oil Price Increase”
Taking the above into consideration, OPEC predicts that there will be a very slow increase in oil prices to about $70 per barrel by 2020 and $95 by “reflecting a gradual improvement in market conditions.”
It is crucial to be aware of the assumptions behind the forecasts, notably the effects of energy policy changes, the increasing shift towards renewable energy and energy subsidies removal.
First of all, OPEC takes into account the rise in alternative energy use. While recognizing that renewable energy is growing at the fastest rate, OPEC believes that it will still be insignificant compared to oil.
In its report, it highlighted that fossil fuels will still be the king of global energy in 2040 holding up to 78% market share. Even though oil’s share would fall about 5% to 25% of total energy consumption, it would be more than offset by the 1.5% annual growth rate of the overall energy market.
Demand for crude oil is projected to rise from 2014’s 91.3 million barrels/day (mbd) to 97.4 mbd in 2020 and 109.8 mbd in 2040.
Secondly, the formidable level of investment required to meet this rising demand for oil would incur higher production costs across all parties, bringing up the lowest tradable price. According to the same report, the future investment need for supply to meet demand is within the range of $10 trillion in the next 5 years.
With the slow oil price recovery, these investments will not be happening soon. Because of this, OPEC plans to increase production from 30 mbd in 2014 to 40.7 mbd by 2040 effectively increasing its market share from 33% to 37% by then.
2015 was a very rough year for many relying on the price of crude oil given its majestic fall to less than half of what it used to be. OPEC’s report signaling its confidence in the distant recovery will offer some hope, but nothing much is expected to change in the short term.