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Long-term oil price assumptions
Last modified on 22 June 2010 at 11:37
Over the longer term, oil prices are expected to rise in real terms as the market power of OPEC producers, particularly those in the Middle East, increases.
Real oil prices are forecast to rise by almost a third by 2011 from their low point in 2009 as the sharp reduction experienced between 2008 and mid-2009 is partially reversed.
As a result, nominal oil prices are expected to average around $83 pb in 2010 picking up to around $87 pb in 2011 as world economic activity revives and oil demand recovers. However, this implies that in 2011 the real oil price, on a 2005 price basis, will still be above 2007 levels when the pick-up in oil prices began to gather pace.
The IMF's assessment in the April 2010 World Economic Outlook suggests that, in the near term, the trend in oil prices will depend in part on how strongly supply responds to the recovery in global demand. Non-OPEC supply is unlikely to expand significantly for two reasons: first the high rates of output decline already being experienced in mature oil fields, notably, in the North Sea and Mexico; and second the sluggish increase in capacity that occurred over 2005-08, due to barriers to investment in many countries. As a result, the supply response will depend primarily on OPEC production.
Over the short-to-medium term, oil prices will, according to the IMF, increase moderately from their current levels, although whether or not there is a renewed oil price spike will depend mainly on the prospects for maintaining sustainable demand-supply balances. As the recovery of the world economy gathers pace, oil demand is expected to grow robustly once again in the emerging and developing economies, led by China and India, despite gains in efficiency that are expected as economic growth in these countries becomes less energy-intensive. Meanwhile, GDP growth is expected to remain subdued in the OECD economies.
On the supply side oil discovery developments have been promising. In the first half of 2009, reported findings of new oil deposits, at about 10bn barrels, were at their highest rate on an annualised basis since the late 1990s. The rise in the rate of new discoveries is not surprising, given recent increases in the net value of oil reserves and the corresponding enhanced incentives for exploration. In this respect, the oil price collapse of late 2008 has proved to be a temporary setback. Oil prices have already reversed much of the declines of 2008 and are now well above the average price over the past decade. Meanwhile, the costs of oil investment have also declined during 2009 and this should support further oil exploration and development. This is supported by the fact that the Baker-Hughes international rig count, an indicator of oil exploration activity, has already recovered some of the losses incurred in late 2008 and early 2009.
Although the recent trend in oil discoveries has been encouraging, the IMF is concerned that it may not meet all supply concerns for the medium term. The main supply bottlenecks have been the slow development of new fields and the poor maintenance of existing fields. This has been due not only to the long time lags before new oil wells become operational, especially if they are situated in technologically advanced and difficult conditions, but also the unfavourable investment regimes in many oil producing countries. However, the higher oil prices, if they are sustained, and the increased value of oil reserves can be expected to boost oil investment.
Over the medium to longer term, the IEA 2009 World Energy Outlook also expects the upward pressure on oil prices to resume in the Reference Scenario, because of rising demand, particularly in non-OECD countries, as the global economy emerges from recession and because also of the rising marginal costs of supply. Marginal costs are expected to rise because, even with additional investment in oil and gas fields of around $250bn pa (measured in 2008$) to 2030, world oil production is expected to rise by just 1% pa over the next two decades as output falls sharply from existing fields in the North Sea, Russia and Alaska and a growing share of world output comes from non-conventional sources, mainly Canadian oil sands, extra-heavy oil, gas-to-liquids and coal-to-liquids. Non-OPEC conventional production (ie crude oil and natural gas liquids) is projected to peak around 2010 and then begin to decline slowly thereafter to 2030. OPEC's combined production of crude oil, natural gas liquids and unconventional mainly gas-to-liquid oil, in contrast, is expected to rise from 36¼ mbd in 2008 to around 40 mbd in 2015 and reach almost 54 mbd by 2030. As a result, the cartel's share of world oil production rises from 44% in 2008 to 53% by 2030.
Demand from emerging economies, led by China and India, and also from the Middle East is expected to drive the growth in global oil consumption over the long term, almost entirely as a result of the growth in transport demand. Despite the growth in biofuels, oil-based fuels continue to dominate transport energy demand with their share projected to fall only slightly from 94% to 92% over the period to 2030.
The IEA remains concerned that the relatively moderate growth in oil demand expected over the next few years, by restraining the growth in investment in new and existing production capacity, will magnify the downward pressure on world oil production and so could still trigger a sharper increase in oil prices sometime over the medium term. A key longer-term constraint on oil supply is that more investment is needed just to maintain current capacity, as new oil fields are smaller in size and present greater technological and geological challenges, while the output decline rates of many existing, typically larger, fields have risen by more than previously expected.
In the longer term to 2020 real oil prices are expected to rise by around 2% pa, as global dependence on OPEC supplies increases while the decline in non-OPEC production is moderated as lower supplies of oil and natural gas liquids are partially offset by higher output from non-conventional sources and the demand for oil, led by developing countries, continues to grow.