- EIA’s high-price scenario sees $225 in 2040
- Middle East, Russia, U.S. to dominate crude supply
- EIA pegs global demand to average 110-117 mbd in 2040
- U.S. crude output reaches 13.4 mbd in 2022 under the high-price case
Even though long-term outlooks for oil prices are almost always off the mark, they play an important role serving as the basis for discussion among industry, policymakers, and consumers about what the future will hold. The U.S. Energy Information Administration (EIA) last week released its projections for the international oil market for the next three decades, providing three widely different scenarios. The reference case sees oil prices trending upward to approximately $110 per barrel by 2040, while the high-price scenario has the market trading above $225 in 2040. The low-price outlook, meanwhile, estimates that the market will remain below $50 over the long run. With wide-ranging scenarios, the agency does not provide clarity for the long term. However, the price skew (e.g. sub-$50 versus $225) implies that risks are to the upside.
Although oil would surpass $200 per barrel under the high-price scenario, the EIA sees little effect in curbing demand growth.
The EIA’s high-price case is based on higher-than-expected annual global economic growth of 3.1 percent, a realistic outlook. The International Monetary Fund (IMF) projects the world economy to grow by 3.5 percent this year, and 3.6 percent in 2018. Although the oil price would surpass $200, the EIA sees little effect in curbing demand growth. Under the EIA high-price scenario, world oil consumption at 110 million barrels per day (mbd) in 2040, only 2.9 mbd lower than the reference case.
Strong demand growth occurring in the face of sharply higher prices reflects the inelastic nature of oil consumption, and reinforces the likelihood of upward pressure on the oil market in coming decades. Although alternative-fueled vehicles make inroads, petroleum remains dominant, powering 88 percent of the transportation sector globally in 2040. Emerging economies, continuing on their current trends, will need more oil as their economies continue to grow. In non-OECD countries, oil demand is set to rise by 1.3 percent per year, or 18 mbd in all, despite higher prices, while the OECD contracts by roughly 4 mbd over the next two and a half decades as a result of improved efficiency (see graphic below).
While the EIA’s high-price scenario is based on strong economic growth, a number of supply developments also risk pushing prices higher over the longer term.
While the EIA’s high-price scenario is based on strong economic growth, it does not take into consideration supply-side constraints. A number of supply developments also risk pushing prices higher over the longer term. OPEC policy, unexpected supply disruptions, petro-state corruption and mismanagement, geological constraints, corporate investment decisions, and thin spare capacity all shape market dynamics. Faced with underinvestment during the current price downturn, the oil market also is in danger of seeing a supply gap and a price spike in the medium term. The International Energy Agency’s Neil Atkinson said recently: “There are still not enough signs of investment beginning to return, and that raises the risk of tightening of the market in the next five years and a risk to the stability of oil prices. There is at least a possibility of going back to the situation we had 10 years ago where oil prices were very, very high at a time when demand was growing.”
Supply growth as uncertain as price direction
One silver lining in the high-price scenario: U.S. and total non-OPEC supply see stronger growth and capture more market share. The stronger-price environment stimulates higher-cost production outside of the cartel. In this scenario, non-OPEC countries supply about 60 percent of the world’s needs. In the low-price case, however, the cartel has much larger market share. “OPEC is expected to maintain its strategy of capturing market share during price downturns,” the EIA says. OPEC’s market share rises to 56 percent as Middle East countries produce 41 mbd, up from about 27 mbd now. Russia is also expected to see stronger growth with lower oil prices, rising from today’s levels of 11 mbd to 12.6 mbd in 2040. By contrast, U.S. crude output reaches 13.4 mbd in 2022 under the high-price case, before steadily declining through 2040. In the reference case, though, growth is modest. U.S. crude supply peaks at 10.5 mbd in 2026 and plateaus at that level until the early 2030s.
“OPEC is expected to maintain its strategy of capturing market share during price downturns.”
The EIA’s supply estimates will, of course, likely be off-target. EIA’s long-term projections are based on current policies and existing technologies. Wild cards for the long-term direction of oil supply include but are not limited to environmental policies, innovation in drilling and transportation, international conflicts, and OPEC policy. All of these different variables add a high degree of uncertainty into the future of the oil market and make forecasting difficult. In the EIA’s 2008 projections, the agency said shale oil would grow globally by 60,000 barrels per day through 2030. In the U.S., shale output is now approaching 6 mbd, highlighting how far off the mark outlooks have been in the past.
Nevertheless, despite the limitations, the agency’s projections provide a warning against contentment. Currently, oil market risks are masked by low prices. In the coming years, dynamics will change and risks will be amplified. Tomorrow’s oil market most likely will look a lot different than today’s.