The yearly World Oil Outlook report from OPEC was recently issued. It hints at the prospects for the energy industry 25 years into the future. OPEC reveals its prediction for oil prices returning to at least US$70 by 2020 and US$95 by 2040.

Higher-cost US shale oil producers joining the market are a major reason why oil prices plummeted by more than half. OPEC is unwilling to give up its market share, flooding the world with an abundance of oil and cutting its price as per supply and demand.

This market-share war plan worked for OPEC and it retains a large share of the global oil market.

Yet dismal oil prices deterred new energy investments by competitors. Hundreds of billions of dollars worth of new construction was abandoned in the process. The stock market lost more than a trillion dollars worth of market capitalization.

“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.” said OPEC’s Secretary-General Abdalla Salem Al Badri in the report.

This dire situation of oversupply will remain in the near future. At least with OPEC still 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. They’ll rise to about $70 per barrel by 2020 “reflecting a gradual improvement in market conditions.”

It’s crucial to be aware of the assumptions behind the forecasts. The effects of energy policy changes, an increasing shift towards renewable energy, and energy subsidies removal are important for investors to understand how the energy sector will change in the meantime.

First of all, OPEC takes into account the rise of alternative energy use. They recognize renewable energy is growing at the fastest rate. But OPEC believes the green energy market will still be insignificant compared to oil.

The report highlighted that fossil fuels will still be the king of global energy in 2040, holding around 78% market share.

Oil’s share will fall about to about 25% of total energy consumption. However, it would be more than offset by a 1.5% annual growth rate of the overall energy market.

Crude oil demand is projected to rise from 91.3 million barrels/day (mbd) to 97.4 mbd in 2020. Demand will rise even further to 109.8 mbd in 2040.


High Oil Production Costs Remain

Second, the high level of investment needed to meet rising demand for oil would incur higher production costs across all parties, bringing up the lowest tradable price.

The same report says that future investment needed for supply to meet demand is about US$10 trillion over the next 5 years.

With the slow oil price recovery, these investments will not be happening soon. OPEC plans to increase production from 30 mbd in 2014 to 40.7 mbd by 2040 because of this.

2015 was a rough year for anyone relying on the price of crude oil, especially given its dramatic fall by over 50% since 2014. OPEC’s report signaling its confidence in the distant recovery will offer some hope.

We don’t expect any big changes in the short term. But over the long-term, OPEC will become more irrelevant. There’s little the organization can do to stop it.

UPDATE FOR 2017: This article is from January of 2016. The low oil price situation remains as of August, 2017. All predictions in this article stand.


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About Reid Kirchenbauer

Reid Kirchenbauer is the Founder of InvestAsian. He's an accomplished stock trader and property investor in Thailand, Cambodia, and many other places. He's been featured in publications such as Forbes, Nomad Capitalist, Property Report, and Seeking Alpha. Download his free investment guide by clicking here.

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