Text size:

  • Small
  • Normal
  • Large

Experts argue the toss over the future of oil

OPEC and other producers are looking for assurances that a market for their oil will still exist in decades to come.

Two years ago in Rome, oil producing and importing countries met to reach a ceasefire on an escalating war of words over rocketing oil prices. With crude months away from its eventual all-time record of US$147 a barrel, reporters hounded OPEC ministers with questions on whether the group would comply with calls to increase supply to the market.

The spotlight has shifted dramatically. As ministers convene in Mexico at the end of this month for the biennial International Energy Forum, OPEC and other producers will be looking for their own assurances that a market for their oil will still exist in decades to come. A consensus that the world will have a rising need for oil for decades has been broken, with many experts arguing that slower economic growth and green energy policies will significantly dampen the growth in global oil consumption. Even in the short term, a number of respected experts say crude oil is overvalued and set for steep declines.

"I think some of the forecasts for overall growth in demand for oil are actually a bit on the high side," says Jorge Montepeque, the global director of market reports at Platts, an oil pricing service based in the US. "It seems the picture for 2015 and beyond, it's looking like a market with a lot of oil looking for a home." The level of uncertainty about oil's future is reflected in the large differences between the forecasts submitted last week by OPEC and the International Energy Agency (IEA), the Paris-based group that represents the interests of energy importing states.

Each side's forecast, which will be included in background documents for the forum, supports its policy position. The IEA, for instance, bases its forecast on an average economic growth rate of 3.1 per cent and warns that if extra policy measures are not taken to curb the use of all fossil fuels, oil prices will by 2030 reach $190 per barrel, without an adjustment for inflation. "Energy investment needs to pick up quickly, now that the current recession is ending, to ensure continued and broadened access to reliable and secure energy - and to avoid a renewed tightening in supply as economics recover," the IEA warns.

OPEC, however, sees economic growth averaging 3.0 per cent and predicts crude will remain in the $70 to $100 range in the long run, close to last week's price of about $80. "The resource base of conventional crude, together with non-conventional oil, is more than sufficient to meet future demand," OPEC says. "Therefore, the key issue is not related to availability, but to deliverability and sustainability, as well as to the uncertainties surrounding the extent to which increases in demand for crude will actually materialise."

The scenarios are largely a function of uncertain economic growth and best guesses for how quickly output will decline at existing fields, but green-energy policies under discussion in the West and China add another level of uncertainty to the discussion. The US, the world's largest oil market, has already tightened vehicle efficiency and is considering greater support for electric cars, while Europe is expected to implement similar measures. China, whose increasing use of oil plays the most important role in all models of oil markets, has set its own goals for reducing the growth of its oil imports and its use of fossil fuels, and is expected to increase support for electric cars and enlarge its train network.

OPEC does not offer a specific forecast for the effects of these policies, but notes that oil exports "will be significantly affected" by efforts to reduce carbon emissions to combat climate change. The IEA estimates that an aggressive effort to reduce carbon emissions around the world would reduce oil prices and lower OPEC's 2030 output to 48 million barrels per day (bpd), from 54 million bpd in a scenario in which no action is taken. The agency notes a previous forecast that OPEC revenues would then amount to $23 trillion (Dh84.47tn), about $4tn less than if oil use continued to grow unabated.

But a number of experts say the IEA could be understating the impact of emissions measures on oil. In the US alone, the most aggressive efforts to encourage electric cars and boost vehicle efficiency would reduce US oil demand by between 7 million and 8 million bpd after 2020, says Amy Myers Jaffe, an energy expert at the James A Baker III Institute for Public Policy at Rice University in Texas. The institute will publish a major study on the topic this year. The figure cited by Ms Jaffe is equal to OPEC's estimate for China's total growth in oil consumption between now and 2030.

And major developing countries such as China and India could themselves use policy levers to change their growth trajectories, since the cars and infrastructure have not yet been built, Ms Myers said. "I think there's policy uncertainty in China and India as well, and because they're earlier on the path of having 300 million cars on the road and so forth, changes in policy could have a much more dramatic effect on the outcome," she says.

Ms Jaffe suggests OPEC producers cannot count on oil to hold its high value in the long run. In the face of such vast uncertainty, she says, dialogue between producing and importing countries is crucial so that each side can plan well in advance for developments that can change the supply-demand balance. "Everyone needs to stop thinking about it as a win-lose - if it's high prices I win, if it's low prices, the US or China wins," she says.

cstanton@thenational.ae

Back to the top

More articles


Editor's Picks

 The Greens, villas: Q1 no change. 3BR - Dh210-250,000. 4BR - Dh210-260,000. 5BR - Dh220-300,000. Q1 2013-Q1 2014 5% rise. Pawan Singh / The National

In pictures: Where Dubai rents have risen and fallen, Q1 2014

Find out how rental prices in the prime locations in Dubai have altered during the first three months of the year and the current rates you will pay according to data provided by Asteco.

 Above, the private pool of Ocean Heights' five-bedroom penthouse flat. Courtesy Christie’s International Real Estate

In pictures: Penthouse flat is height of Dubai luxury living

A five-bedroom penthouse in Ocean Heights in Dubai Marina is on sale for Dh25 million and comes with a private pool and an unparalleled view of Dubai.

 The cooling towers of the Temelin nuclear power plant near the Tyn nad Vltavou in Czech Republic. The country wants to continue expanding nuclear energy capacity despite cancelling a tender to build two new units. David W Cerny / Reuters

In pictures: Best business images for the week to April 17, 2014

Here are some of the best business images for the week to April 17, 2014.

 Three generations of the Hakimi family tend to their stall Crawford Market in Mumbai. Subhash Sharma for The National

In pictures: Shopper’s delight at Crawford Market in Mumbai

Crawford Market is an old British-style covered market dealing in just about every kind of fresh food and domestic animal imaginable. Later on renamed Mahatma Jotirao Phule, the market remains popular among locals and visitors by its old name, taken from Arthur Crawford who was the first municipal commissioner of the city.

 The Wind, Energy, Technology and Environment Exhibition takes place from April 14 to April 16. Above, the Dewa showroom during last year’s Wetex. Jaime Puebla / The National

April corporate and economic calendar for the UAE and overseas

From Cityscape to Wetex to stock-market holidays to nations reporting first-quarter GDP figures, here is our helpful calendar of April's business events in the UAE and internationally.

 Get the latest information on credit cards, bank accounts and loan products in the UAE. Mark Lennihan / AP Photo

Rates report: Latest on UAE loans, accounts and credit cards

Souqamal.com brings you the latest interest rates on banking products in the UAE.

Events

To add your event to The National listings, click here

Get the most from The National