From scarcity to abundance
– the future trajectory of oil prices
Inside Out
PREDICTIONS OF THE IMMINENT END OF OIL HAVE ALWAYS BEEN FRAUGHT WITH CONTENTION AND CONTROVERSY.
REPEATEDLY, PEOPLE HAVE CLAIMED THAT THE WORLD IS NEARING A PEAK IN OIL PRODUCTION, YET YEAR AFTER YEAR IT
KEEPS RISING……
As oil prices soared from about $10 a barrel
to over $140 in the 2000s, there was a surge
of interest in peak oil. With the US shale oil
boom having seen off peak oil thinking, now
there is more interest in peak oil demand which
projects a levelling-off in crude production
driven by changes in consumption as the world
increasingly adopts renewable energy sources
and electric vehicles.
In January an excellent new paper was
published by BP’s group chief economist,
Spencer Dale and Bassam Fattouh, director of
the Oxford Institute for Energy Studies, which
provides a clear-thinking assessment of peak
demand and what it might mean.
When will oil demand stop rising?
With growing pressures to decarbonise the
transport sector and the advent of electric
vehicles, oil is facing signifi cant competition for
the fi rst time. This has led to a greater focus on
peak oil demand, and the recognition that as
we see seek to further reduce carbon emissions
and improve our energy effi ciency and urban
air quality, oil demand is likely to stop rising
after 150 years+ of almost uninterrupted
growth.
The supply side of the oil market is
experiencing its own revolution. The advent
of US tight oil has fundamentally altered the
behaviour of oil markets as it introduces a new
and fl exible source of competitive oil. The
application of new technologies, especially
digitalisation, now has the potential to unlock
huge new reserves of oil over the next 20 -30
years.
The prospect of peak oil demand,
combined with increasingly plentiful supplies,
has led some to conclude that oil prices are
likely to decline inextricably over time. If the
demand for oil is drying up and the world
is awash with oil, why should oil prices be
signifi cantly higher than the cost of extracting
the marginal barrel? The days of rationing and
scarcity premiums must surely be numbered?
Growth in oil demand is likely to slow gradually
and eventually peak and, critically, plentiful oil
supplies are likely to fundamentally alter the
behaviour of oil producing economies.
The paper argues that the date when oil
demand will peak is largely misplaced due to
the range of uncertainty being large. Small
changes to assumptions around matters
such as GDP growth and vehicle effi ciency
improvements generate widely varying
demand outcomes.
A sharp decline is unlikely as the world
will continue to require substantial amounts
of oil for many years to come, particularly in
transport and emerging economies which will
require substantial upstream investments for
the foreseeable future.
The signifi cance of peak oil demand
arises principally from the fact that it signals
a paradigm shift from perceived scarcity to
expected abundance.
What is the outlook for oil demand?
Driven by rising pros perity in fast-growing
developing economies, the broad consensus
is that global oil demand will continue to
grow for a while. Over time the pace of that
growth is likely to slow and eventually plateau
due to greater effi ciency improvements and a
combination of technological advances, policy
measures and changing social preferences
leading to higher use of alternative transport
fuels.
Estimates are wide ranging as to when
and at what level oil demand is likely to peak.
Some suggest a peak shortly after 2025, while
others expect demand to continue growing up
to 2040 and beyond.
From today’s circa 97.5 million barrels per
day (bpd), the IEA Sustainable Development
scenario projects a peak of 100 mln bpd
around 2025 and then a gradual decline to
circa 80 mln bpd in 2040.
BP’s last Energy Outlook projects
continued growth through to circa 110 mln
bpd in 2040.
The consensus expects that demand level
between 2035-2040 will be greater than today.
Whenever it happens, there is little evidence
or reason to believe that the peak will trigger
a sharp discontinuity in either oil demand or
investment spending or, even, that it will be a
unique event.
From scarcity to abundance
The notion of peak oil supply has dominated
oil market behaviour over the past few
decades, with the belief that oil would become
increasingly scarce and valuable over time
now being debunked. Indeed over the past 35
years or so, for every barrel of oil consumed,
two have been added to estimates of proven
oil reserves!
A recent BP projection estimated that
based on known oil reserves, and using only
today’s technology, enough oil could be
produced to meet the world’s entire demand
for oil out to 2050, more than twice over.
Future oil discoveries and improvements in
technology are likely to only increase that
abundance.
The world is not going to run out of oil but
it does seem increasingly likely that signifi cant
amounts of recoverable oil will never be
extracted.
The recognition that there is an
abundance of oil is likely to trigger profound
changes in both global oil markets and
the behaviour of the main oil producing
economies with markets becoming increasingly
competitive.
A corollary of this increasing
competitiveness is that the distribution of
‘economic rents’ within global oil markets
is likely to shift. The high ‘rents’ enjoyed by
resource owners are likely to decline, with
consumers benefi ting as a result. To gain
market share, low-cost producing countries will
need to adopt a higher volume, lower price
strategy to the benefi t of consumers. Owners
of higher-cost resources will need to offer
increasingly attractive contracts and fi scal
terms to ensure their oil remains competitive
and able to attract the private sector
investment needed to extract it.
If they can no longer rely on oil revenues
to provide their main source of income for
the indefi nite future, major producers are
likely to seek to diversify, developing other
industries and productive activities. Saudia
Arabia’s Vision 2030 plan is perhaps the
most prominent example of a response
Continued on page 19
Fuel Oil News | March 2018 13