Wednesday, December 30, 2015

$10-Trillion Investment Needed to Avoid Massive Oil Price Spike Says OPEC

OPEC Oil barrels (Credit: Shutterstock) Click to Enlarge.
Of course, some might argue that even that estimate—that the world will be consuming 110 mb/d in 2040—could be overly optimistic.  Coming from a collection of oil-exporting countries, that should be expected.  Energy transitions are hard to predict ahead of time, but when they come, they tend to produce rapid changes.  Any shot at achieving the world’s stated climate change targets will require a much more ambitious effort.

While governments have dithered for years, efforts appear to be getting more serious.  More to the point, the cost of electric vehicles will only decline in real dollar terms over time, and adoption should continue to rise in a non-linear fashion.  That presents a significant threat to long-term oil sales.

At the same time, OPEC also issued a word of caution in its report.  While oil markets experience oversupply in the short- to medium-term, massive investments in exploration and production are still needed to meet demand over the long-term.  OPEC believes $10 trillion will be necessary over the next 25 years to ensure adequate oil supplies.

“If the right signals are not forthcoming, there is the possibility that the market could find that there is not enough new capacity and infrastructure in place to meet future rising demand levels, and this would obviously have a knock-on impact for prices,” OPEC concluded.  About $250 billion each year will have to come from non-OPEC countries.
So what are we to make of this?  There could be plenty of oil supplies in the future, but as it stands, the industry is massively underinvesting?  This illustrates a troubling tension within the oil industry.  Oil prices will be set by the marginal cost of production, and recent efficiency gains notwithstanding, marginal costs have generally increased over time.  Low-cost production depletes, and the industry becomes more reliant on deep-water, shale, or Arctic oil, all of which require higher levels of spending.  In many cases, these sorts of projects are not profitable at today’s prices.

The price spikes seen in 2011-2014 sowed the seeds of the current bust, but the pullback today could create the conditions of another spike in the future.  OPEC could be a bit too sanguine with its call for $95 oil in 2040.

At the same time, future price spikes set up the possibility of much greater demand destruction, especially if alternatives become more viable.  This is the difficult balancing act that the industry must pull off over the next few decades.

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