Oil prices are likely to stay below $80 per barrel for another five years, according to a closely watched energy report.
The International Energy Agency released its 2015 World Energy Outlook (WEO), with predictions for energy markets out to 2040. Although there are no shortage of caveats, the IEA projects that oil prices will only rebound slowly and intermittently, and the supply overhang will slowly ease through the rest of the decade. In its “central” scenario, it sees oil prices rebalancing in 2020 at $80 per barrel, with increases in the years following.
At issue, as always, is supply and demand dynamics. The IEA estimates that the oil industry will slash upstream investment by 20 percent in 2015, which will cut into long-term supply figures. Non-OPEC supply will peak before 2020 as a result of much lower investment, topping off at 55 million barrels per day. Related: Venezuela Liquidating Assets As Economic Crisis Worsens
U.S. shale will recover as prices rebound, but the IEA still sees it as a passing fad. As the sweet spots get played out in the U.S., and costs remain elevated compared to other sources of production from around the world, shale will not be around for the long haul. The IEA sees U.S. shale output plateauing in the early 2020s at 5 million barrels per day. Thereafter, it declines.
The IEA weighs a scenario in which oil prices don’t actually rebound in the medium to long-term, however. In this scenario, OPEC continues to pursue market share, U.S. shale remains resilient, and the global economy doesn’t perform as well as expected. All of that adds up to oil prices remaining at $50 per barrel through the remainder of the decade and only rising to $85 per barrel by 2040.
Of course, there is a flip side to that coin. Persistently low prices gut investment in new sources of supply, which sow the seeds for a supply shortage in the years ahead. As a result, prices could spike. Related: Oman Calls OPEC To Action, Doesn’t Buy Saudis Strategy Anymore
Translation: nobody knows what will happen to oil prices. So it is important to remember that the IEA merely puts forward educated guesses based on a range of assumptions.
On the demand side, the IEA sees only 900,000 barrels per day in average annual increases in demand through 2020, which is just half of the 1.8 million barrels per day in demand growth the agency expects to see in 2015.
Although it is almost not even worth looking at projections out to 2040, the IEA still expects the U.S., the EU, and Japan to slash their oil demand by a combined 10 million barrels per day over the next 25 years. That is a massive amount to be sure, but given the fact that the IEA has consistently underestimated the pace of adoption for renewables and energy efficiency, there is a good chance that it is understating the true extent to which the industrialized world will shift away from crude oil in the coming decades. Related: How Shale Oil Will Survive The Crude Carnage
In fact, that could be the most important takeaway from the report. The IEA says that there are “clear signs that an energy transition is underway: renewables contributed almost half of the world’s new power generation capacity in 2014.” That is expected to continue – the IEA sees 60 cents out of every dollar spent on new electric power plants through 2040 will go to renewable energy. That spells trouble for coal, the report says. Coal accounted for 45 percent of the increase in global energy demand over the past decade, a share that drops to just 10 percent between now and 2040.
Policy is reinforcing cost trends – renewables are getting cheaper while fossil fuels are expected to become more expensive. It is inevitable that renewable energy will continue to grow and capture more market share, slowly but surely cutting out oil, gas, and coal.
“The biggest story is in the case of renewables,” IEA executive director Fatih Birol said when launching the report. “It is no longer a niche. Renewable energy has become a mainstream fuel, as of now.”
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By Nick Cunningham of Oilprice.com
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And guess what? One day soon, because of emerging technologies, the saliva dripping fangs of the money-grabbers waiting to chomp on Bakken will start nibbling at 50, then 45, then 40, then ...
The Bakken does not have enough economic drilling locations at $55 to $75 dollars to supply North Dakota for our lifetimes... let alone make a significant impact on global supply. Read the text- North American shale will play out in 10 years. Will companies bring rigs on as price increases?- sure. But the net effect will not offset declines from legacy shale fields, deep-water projects, and natural decay of conventional production worldwide. That said, it will not take until 2020 for oil to rebound to $80. Not with current conflict in ME, loss of supply from shale and Russia. Iran estimates are way overblown. Any new investment in Iran comes with long term contracts subject to implementation of future sanctions. No majors will invest in Iran. A good chunk of production from Iraq is likely being smuggled from Iran anyway. Once traders catch on and negative sentiment has dried up... oils bid will return.