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

by Nick Cunningham of

OPEC says that $10 trillion worth of investment will need to flow into oil and gas through 2040 in order to meet the world’s energy needs.

The OPEC published its (WOO) in late December, which struck a much more pessimistic note on the state of oil markets than in the past. On the one hand, OPEC does not see oil prices returning to triple-digit territory within the next 25 years, a strikingly bearish conclusion. The group expects oil prices to rise by an average of about $5 per year over the course of this decade, only reaching $80 per barrel in 2020. From there, it sees oil prices rising slowly, hitting $95 per barrel in 2040.

Long-term projections are notoriously inaccurate, and oil prices are impossible to predict only a few years out, let alone a few decades from now. Priced modeling involves an array of variables, and slight alterations in certain assumptions—such as global GDP or the pace of population growth—can lead to dramatically different conclusions. So the estimates should be taken only as a reference case rather than a serious attempt at predicting crude prices in 25 years. Nevertheless, the conclusion suggests that OPEC believes there will be adequate supply for quite a long time, enough to prevent a return the price spikes seen in recent years.

Part of that has to do with what OPEC sees as a gradual shift towards efficiency and alternatives to oil. The report issued estimates for demand growth five years at a time, with demand decelerating gradually. For example, the world will consume an extra 6.1 million barrels of oil per day between now and 2020. But demand growth slows thereafter: 3.5 mb/d between 2020 and 2025, 3.3 mb/d for 2025 to 2030; 3 mb/d for 2030 to 2035; and finally, 2.5 mb/d for 2035 to 2040.

The reasons for this are multiple: slowing economic growth, declining population rates, and crucially, efficiency and climate change efforts to slow consumption. In fact, since last year’s 2014 WOO, OPEC lowered its 2040 oil demand projection by 1.3 mb/d because it sees much more serious climate mitigation policies coming down the pike than it did last year.

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.

In a similar but more disconcerting conclusion, the Oslo-based Rystad Energy recently that the current state of oversupply could be “turned upside down over the next few years.” That is because the drastic spending cuts today will result in a shortage within a few years.

To put things in perspective, Rystad says that the oil industry “needs to replace 34 billion barrels of crude every year—equal to current consumption.” But as a result of the collapse in prices, the industry has slashed spending across the board and “investment decisions for only 8 billion barrels were made in 2015. This amount is less than 25% of what the market requires long-term,” Rystad Energy concluded.

The industry cut upstream investment by $250 billion in 2015, and another $70 billion could be cut in 2016. The latter figure did not take into account the recent decision by OPEC to its production target, which sent oil prices .

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.

Nick Cunningham is a Vermont-based writer on energy and environmental issues. You can follow him on at @nickcunningham1

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Comments

Lad

OPEC recognizes the threat of electric transportation on their business and is taking measures to counteract the EV movement by fixing crude prices to a much lower level. A level designed to close off U.S. oil competition and to slow down EV progression.
Sadly, it's working as witnessed by the ignorance of the U.S. driver who has returned to buying gas guzzlers and burning up the roads.

Eventually EVs will be the car of choice; but, not without a long drawn out battle with the fossil fuel stakeholders.

Tesla is the leader in EVs. So goes Tesla, so goes EVs.

Engineer-Poet

So OPEC says that $10 trillion is needed, while pursuing a market-share strategy which has many petro-states running deficits.

I don't believe this.  There may be a short-term price spike coming (which will drive the world economy into recession again) but it will have the effect of driving the market for EVs, PHEVs and hybrids.  If all Camry sales became Camry hybrids, city fuel consumption would drop by almost half.  Those lost fuel sales would go on for the life of the car, over 10 years.  LNG and CNG are poised to replace the bulk of diesel consumption in trucking in N. America (and probably much of the world); the engines are here, just waiting for the price pressure.

Nobody will be happier to see OPEC go over a cliff than me.

Account Deleted

Lad OPEC said elsewhere in the news that they expected EVs to stay irrelevant until at least 2040 so I do not think OPEC realizes what is happening. When those self-driving taxi BEVs start hitting the road for commercial service in about 2020 then even 30 USD per barrel cannot save OPEC. About 66% of the global production of oil is used to make gasoline and diesel and that demand will be largely gone in 30 years after the first fully self-driving taxi services are started. We only need to make 15 million self-driving vehicles per year to replace the transportation services of about 100 million non-self driving vehicles because they can be operated for 100,000 miles per year instead of the typical 15000 miles per year for self-owned cars. However, it will still take some 30 years to make a complete transition because of all the legacy vehicles that still run on oil.

I expect BEVs to stay largely irrelevant until they become self-driving and thereby can overcome their high capital cost versus gassers. So I am patiently aviating the emergence of those self-driving taxi BEVs.

Engineer-Poet

You're way too optimistic on vehicle count, Henrik.  A taxi can only drive one route at a time and people getting to and from work have to do it during relatively short windows of time.  Also, the BEV taxi can only go so far before it needs downtime to recharge.  That said, there is certainly room to cut the required number of vehicles by sharing them.

Alain

We may still need hydrocarbons for decades to come, but it doesn,t need to be fossil.

Electrofuels, advanced biofuels by algae, cyanobacteria, ...
If we are willing to invest 250B/year to have fuel, let's invest cleverly...

HarveyD

All of the above is possible if the consumers are willing to make the right moves. Of course, Norway style subsidies and benefits help.

We effectively cut our liquid fuel consumption by more than 50% with the combined use of Toyota Camry Hybrid and Prius at very little extra initial cost versus equivalent quality ICEVs. Those Hybrids run perfectly in all kind of weather and no charging facilities are required.

Using PHEVs + appropriate charging facilities if much better. Pure all weather extended range BEVs and FCEVs may be the answer in the post 2020/2025 era?

Sharing autonomous drive e-vehicles to work and back would greatly help to reduce fuel consumption, the number of vehicles on the roads and streets, commute times, accidents together with lower insurance premium by 2030 or so.

Account Deleted

EP initially it will not be a problem to log 100,000 paying miles per BEV taxi. There will not be a lot of them around and they can cost less than half the price of a taxi with driver and still be far more profitable so people who need transport will use those self-driving BEVs if they can get one. In a mature system where perhaps 90% of the population is forgoing private ownership and just use these self-driving taxis you may be right that 15/100 is a stretch. It could be as low as 1/4. However, peak prizing like Uber has already implemented can change people's behavior so not everybody order transport at the same time in the same direction. Factories, offices and shops etc can also benefit from operating 16/24 hours rather than 8/24 hours that we mostly do today thereby under-using our infrastructure. It will be a more efficient use of resources to have our society open for as many hours as practically possible during the year. Apart from 22:00 to 6:00 I would say everything should be in business all year around and when people see how much they can save by accepting that they will go for it.

There will be plenty of time for charging for a self-driving taxi. At an average of 40 mph and doing 100,000 miles it will take 2500 hours (=100000/40) and there are 24*365=8760 hours in a year.

kelly

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

The headline sounds like petroleum jelly[AKA Vaseline]

note: further text is only a test for censorship virus spread:

http://www.businessinsider.com/r-kalobios-pharmaceutical-files-for-bankruptcy-2015-12#comment-form
Graduate of the Trump University?
Apologies! We're having a technical issue with our commenting system. Please try again later. [for 'Insider' weeks]


kelly

like petroleum jelly, the spread continues..

http://www.techinsider.io/us-ban-microbeads-soap-environment-beauty-obama-2015-12#comment-form
"Check out a list of products that contain microbeads and will potentially be banned with the passing of the new law. ":

5 screens

Apologies! We're having a technical issue with our commenting system. Please try again later.

Lasvegas

And here I thought that ten TRILLION dollars was a "massive" price in itself.
Silly me.

JMartin

The spike in oil prices may well come, due to lack of investment. But who is going to do that investing. International banks are already predicting huge stranded assets in fossil fuels. If I had a spare 10 trillion, I would put it in alternative energy, not oil. That means more volatility in oil, and faster adoption of low-mileage cars.

SJC

With HEV, PHEV, EV and higher mileage we will use less fuel, more of that fuel can be renewable. OPEC can figure out what investments to make, we don't have to be part of that.

SJC

"About $250 billion each year will have to come from non-OPEC countries."

NO WAY, go pound sand!

Arnold

@ Kelly,
What a novel approach to garbage disposal - except it been an industry standard for well - almost forever. Used to be lead based beauty products.

Ugly is as Ugly does.

There is a similar less well known contribution from micro fibres.
A "simple"? "filter" could be added to the washing machine outlet would solve that.

I can imagine a simple HEPA type filter as a permanent grey water fitment.

The timely implementation of that device could obviate the need for one on the other (sewage) side.

Please moderate your use of offensive language, we are quite tolerant of the occasional c words, f words, racism and bigotry but PLEASE not the T word.

HarveyD

In the mid and long terms, the price/use of Oil should go down together with whale oil, coal gas, wood/coal burning and other polluting fuels.

Technology progress (lower cost stored REs) and plain necessities (pollution) will put an end to the production/use of fossil and bio-fuels not their availability.

mahonj

We have to think about the whole world consuming oil, not just the developed world.
I would expect consumption to increase in china, India and Africa as these economies start to (continue to) increase in size and oil demand.
I wouldn't bet on oil staying cheap for that long - 5-10 years, max.
But then, "Prediction is hard, especially about the future"

Alain

@ Mahonj,
New technologies will have one essential market effect : the end of monopoly !

In a market economy, unreasonably high prices are always the consequence of either scarcity or monopoly.
Until recently, there was a monopoly (actually oligopoly) in the oil production industry. That's why some could produce crude at 6$/barrel and sell at 140$/barrel.
Now, everything has changed forever. Coal to liquid, gas to liquid, biomass to liquid, algae fuel, cyanobacteria fuel, electrofuel, renewable hydrogen, ...
New technologies make any kind of energy interchangeable. With (extremely) cheap 3d generation biofuels, and solar/wind electricity arriving, and milions of acres of deserts available for solar, the ocean available for wind, next-gen nuclear power, ... we have only to pick one of many options to push the "free market price" of liquid fuels to even much lower levels than today.

Even more: as carbon-neutral fuels will become cheap and available soon in unlimited amounts, carbon tax on fossils will do the final kill on crude. tax on fossils may become higher than the production cost of renewables.

Also in the emerging economies, renewable fuels will become cheaper than crude, particularly when you count that those countries have an abundance of cheap labour, and a shortage of dollars.

JMartin

@ Alain
I am not sure I understand your point about cheap labor, but emerging countries certainly have a shortage of dollars. Oil refineries and transport are very capital intensive (disregarding the cost of finding the stuff). Solar and Wind can be installed incrementally and locally with much lower capital cost, and the energy is available quickly. So, emerging countries will move more quickly to renewables than many developed countries.

mahonj

@Alain, there was an oligopoly, perhaps, but the main problem was demand, which was solved in 2008 by the crash and then prices began to rise again in 2011 but were crushed by a surge in supply from fracking, mainly in the USA.
"Coal to liquid, gas to liquid, biomass to liquid, algae fuel, cyanobacteria fuel, electrofuel, renewable hydrogen, ...
New technologies make any kind of energy interchangeable."

>> None of these has had a major effect, the main effects have been from Fracking, corn and sugarcane ethanol (+ mandates), and increases in fuel economy in the US.

They may have an effect in the future (and I hope at least one of them will) but as of now they are barely more than lab demos (excluding BEVs which seem to be breaking out a bit).

We can expect further increases in supply when Iran gets going, and when(if?) Iraq and Libya get sorted out.

@JMartin, Solar and wind can be installed incrementally, but they aren't much use for transport, for that you primarily need oil.

Engineer-Poet

In practice, solar and wind require fast-responding backup.  Theoretically this can be hydro or batteries, but in practice this is almost always natural gas.  The natural gas interests love "renewables" because it locks them in for the 2/3 of generation that wind and solar can't provide.

Alain

I agree at this moment synthetic fuel have only a marginal contribution, but it will not take a decade before that changes.

They talk about 2040 !!! That's 25 years in the future
25 years ago was, Prius wasn't built, lithium batteries were not invented yet, the largest wind turbines were 250 kW, ...

HarveyD

Two direction H2 to clean e-power to H2 will soon be another alternative solution for REs and FCEVs.

The polluting NG and bio-gas avenues will be dropped in the mid term.

Henry Gibson

The US and EUROPE could require by law the use of Artemis Hydraulic hybrid technology and reduce automotive fuel use to half of its present amount. Low flow shower heads are required??? ..HG..

kalendjay

Never mind the EV's. There is no indication that we will follow the pattern of the 80's and 90's of relaxing CAFE and other standards simply because fuel is dirt cheap. Since it is now a fact that older, not younger Americans are leading the charge as apartment dwellers, we can expect a renaissance of mass transportation to accompany anew skepticism over suburban development and highway finance. There are diminishing returns to buying bigger and bigger cars, and benefits to cutting natural gas use for household heating and redirecting this to the auto sector.

All this means a palpable decline in petroleum use over the next ten years, and greater disfavor than ever over that 10 trillion dollar investment.

HarveyD

That was the forecast 10 years ago and liquid fuel consumption has gone up not down.

More people will keep driving and flying more and more and will consume more liquid fuels, NG and bio gas for 20 to 40 more years unless new taxes raises price.

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