What does OPEC think about the future of oil?
The new ‘World Oil Outlook’ report from Opec, according to its secretary-general Abdullah Salem Al Badri, “aims to share Opec’s views on the world’s energy prospects, and its associated challenges and opportunities.” The report, in its seventh edition, “discusses the principal issues that could shape the future of the global energy markets, particularly in relation to oil.”
The report assumes oil prices to remain stable in the long run as the rising cost of the marginal barrel would prevent their drop and, therefore, in nominal terms, a $110 per barrel on average up to 2020 and then rising gradually to $160 a barrel by 2035...which is only $100 a barrel in real terms.
Economic growth will always be the main driver of the energy market and there are signs of an improving outlook such as the fact that the average annual growth is expected to be 3.8 per cent up to 2018 and 3.5 per cent for the rest of the period.
The world population of seven billion in 2012 is forecast by the UN to increase to 8.6 billion in 2035, with 63 per cent living in cities and, therefore, dependent on energy and oil requirements.
Energy policy, especially in developed countries, the encouragement for the use of biofuels, environmental policies skewed against fossil fuels and the high level of taxation on petroleum products would all impact the forecasts. Take for example the EU’s aim of using 10 per cent biofuel in its energy mix by 2020. This is highly questionable with the European Parliament looking at 6 per cent only.
Demand for energy in Opec’s reference case is expected to increase by 52 per cent between 2010-35 and the share of fossil fuels would remain above 80 per cent. Shares of oil, coal and gas are expected to converge at around 26–27 per cent by the end of the period.
In absolute terms total primary energy requirements would increase from 252 million barrels of oil equivalent (mboe) a day to 382. Gas demand is expected to grow the fastest due to its environmental qualities and its inroads into power generation as a substitute for coal, especially in the US after shale gas became amply available and inexpensive.
It is for the first time in many years that long term oil demand in 2035 is now estimated at about 2.5 mbd over earlier forecasts. Oil demand is expected to reach 108.5 mbd - or 20 mbd over 2012 levels.
Demand in the developing countries will probably equal that of the developed countries of the OECD by 2019 and rise thereafter. Rising transport capacities in the developing countries is a major factor.
The report says that passenger cars in China will increase from 43 per 1,000 population to 320 between 2010-35 and the total number of cars will increase by 380 million units. Other regions will experience growth but not as much, and the global base of commercial vehicles would pass the 500 million mark.
In spite of vehicle efficiency mandates driven by policies, only hybrid cars are likely to be a workable option to gasoline and diesel driven vehicles as fully electric cars are expensive and need frequent charging. Natural gas driven cars need a lot of infrastructure which is not yet in place.
Opec assures us that the diversity of supply sources — crude oil, NGLs, oil sands, gas and coal-to-liquids, and biofuels — are available and that in the reference case crude oil production is expected to be 37.5 mbd, or 6 mbd lower from what it is now. This is a warning to some members who are increasing their capacity overlooking market realities.
There is a risk of an upside supply scenario where tight oil and biofuels could increase further at the expense of Opec, thereby pushing production to 31.7 mbd only by 2035. There is also, of course, the possibility of higher economic growth which will give Opec further room to increase its production to 45mbd in contrast to a low economic growth scenario where production is 27mbd only. These scenarios call for prudence and a careful follow up in the market.
Liquid sources other than conventional crude oil are likely to be around 36mbd by 2035, leaving conventional crude oil at 72 mbd, which is close to what it is now. This is really something to think about especially in our region of strictly conventional crude.
Though Opec is more optimistic this year, it remains to be seen whether this optimism is in order.
By Saadallah Al Fathi