Oil price forecasts over the next few decades

The price of oil in the next two or three decades will be crucial to the aviation industry.  However, there remains great uncertainty. Each year, DECC does forecasts for the price of oil out to 20 years ahead, with high, central and low forecasts. The International Energy Agency  (IEA) also produces three figures, as does the US Energy Information Agency (EIA), and there are many other forecasts. With the prospect of huge volumes of “tight” oil, from shales, in the USA, as well as oil from tar sands, world supplies of oil are now expected to be much larger than was predicted some 5 – 10 years ago. The impact of the new oil in the USA in particular may only have an impact for a couple of decades, but nevertheless the arrival of “peak oil”  or even “peak cheap oil” may have been postponed.  Nevertheless, it is puzzling how in the Chancellor’s Autumn Statement in December, he used figures for his anticipated price of oil from 2014 to 2018 well below those of DECC only two months earlier.

 

Oil price figures from the Autumn Statement, in December 2012

The “key fiscal determinants” on page 87 of the Autumn Statement has
Oil prices ($ per barrel)

Outturn

2011/2012    $ 111

2012/2013     $ 112

2013/2014     $ 106

2014/2015     $ 102

2015/2016     $ 98

2016/2017     $ 95

2017/2018     $ 92

http://cdn.hm-treasury.gov.uk/autumn_statement_2012_complete.pdf

By contrast, the lowest estimate by DECC (in 2011) for 2018 was $95.5 and the lowest estimate by DECC (in 2012) for 2018 was $ 95.9.  There is no explanation in the Autumn statement as to why the figure for 2017/8 is so much lower than that from DECC only two months earlier.

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Contrast these figures with those from DECC.

DECC’s Forecasts, in 2011 and 2012

DECC’s range of oil price forecasts – in October 2011 at  http://www.decc.gov.uk/assets/decc/11/about-us/economics-social-research/2934-decc-oil-price-projections.pdf

 


 

DECC’s range of oil price forecasts in October 2012 at  http://www.decc.gov.uk/assets/decc/11/about-us/economics-social-research/6658-decc-fossil-fuel-price-projections.pdf

 

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Checking to see if DECC had changed the policy that assumes that oil stays at its 2030 price ever afterwards, there is a revision of the Interdepartmental Analysts’ Group Appraisal Guidance that issued in Oct 2012 and the spreadsheet tables that go with it were updated on 20th December.

http://www.decc.gov.uk/en/content/cms/about/ec_social_res/iag_guidance/iag_guidance.aspx

from Table 16 Fossil Fuel Price Assumptions

Oil Prices (real 2012 $/bbl)

low central high
2010 84 84 84
2011 114 114 114
2012 105 115 125
2013 103 116 128
2014 102 117 131
2015 100 118 134
2016 99 119 137
2017 97 120 140
2018 96 121 144
2019 95 122 147
2020 93 124 151
2021 92 125 154
2022 90 126 158
2023 89 127 162
2024 88 128 165
2025 86 129 169
2026 85 130 173
2027 84 131 177
2028 83 133 181
2029 81 134 186
2030 80 135 190
2031 80 135 190
2032 80 135 190
2033 80 135 190
2034 80 135 190

This set of tables supports the October 2012 version of the appraisal guidance.
These tables were last revised on 20 December 2012.

So the $92 / brl assumption for the Autumn Statement has now turned into a central forecast of $120 for 2017/18 then ?

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The US Energy Information Administration (EIA) wrote their                                   Annual Energy Outlook in June 2015. It goes up to 2035.

http://www.eia.gov/forecasts/aeo/pdf/0383(2012).pdf

The have three scenarios, Reference, High and Low. Details of these are on pages 24 and 25 (36 and 37 out of 252).

The Reference case projection is a business-as-usual trend estimate, given
known technology and technological and demographic trends.

http://www.eia.gov/forecasts/aeo/pdf/0383(2012).pdf

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 IEA web pages on oil price forecasts

http://www.iea.org/newsroomandevents/pressreleases/2012/november/name,33015,en.html

…. in the New Policies Scenario ….oil demand reaches 99.7 mb/d in 2035, up from 87.4 mb/d in 2011, and the average IEA crude oil import price rises to $125/barrel (in year-2011 dollars) in 2035 (over $215/barrel in nominal terms).

http://www.iea.org/publications/freepublications/publication/English.pdf

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 http://www.worldenergyoutlook.org/media/weowebsite/2012/factsheets.pdf

WORLD ENERGY OUTLOOK 2012 FACTSHEET
How will global energy markets evolve to 2035?

Taking all new developments and policies into account, the world is still failing to put the global energy system onto a more sustainable path. The New Policies Scenario, our central scenario, shows that several fundamental trends persist: energy demand and CO2 emissions rise ever higher; energy market dynamics are increasingly determined by emerging economies; fossil fuels remain the dominant energy sources; and providing universal energy access to the world’s poor continues to be an elusive goal.
Energy demand and CO2 emissions rise ever higher in the New Policies Scenario. Global energy demand increases by over one‐third in the period to 2035. Energy‐related CO2 emissions rise from an estimated 31.2 Gt in 2011 to 37.0 Gt in 2035, pointing to a long‐term average temperature increase of 3.6 °C. A lower rate of global economic growth in the short term would make only a marginal difference to longer‐term energy and climate trends.

Fossil fuels remain the principal sources of energy worldwide, though renewables grow
rapidly.  Demand for oil, gas and coal grows in absolute terms through 2035, but their combined share of the global energy mix falls from 81% to 75% during that period. The unlocking of unconventional resources portends a very bright future for natural gas, which nearly overtakes coal in the primary energy supply mix by 2035. Nuclear power maintains a 12% share of electricity generation, a downward revision from previous projections in light of additional policy changes in several countries prompted by the accident at Fukushima Daiichi. Renewables deployment is driven by incentives, falling costs, rising fossil fuel prices and, in some cases, carbon pricing: their share of electricity generation grows from 20% in 2010 to 31% by 2035.

Growth in oil consumption in emerging economies, particularly for transport in China, India and the Middle East, more than outweighs reduced demand in the OECD, pushing global oil use steadily higher.  Global oil demand in the New Policies Scenario, our central scenario, increases slowly to 2035, reaching 99.7 mb/d – up from 87.4 mb/d in 2011. China alone accounts for 50% of the net increase worldwide. A steady decline in OECD regions is brought about by efficiency gains, inter‐fuel substitution and saturation effects.

Non‐OPEC oil output steps up over the current decade, but supply after 2020 depends
increasingly on OPEC.   A surge in unconventional supplies, mainly from light tight oil in the
United States, and oil sands in Canada, natural gas liquids, and a jump in deepwater production in Brazil, pushes non‐OPEC production up after 2015 to a plateau above 53 mb/d, from under 49 mb/d in 2011. This is maintained until the mid‐2020s, before falling back to 50 mb/d in 2035.  Output from OPEC countries rises, particularly after 2020, bringing the OPEC share in global production from its current 42% up towards 50% by 2035. The net increase in global oil production is driven entirely by unconventional oil, including a contribution from light tight oil that exceeds 4 mb/d for much of the 2020s, and by natural gas liquids. Of the $15 trillion in global upstream oil and gas investment that is required over the period to 2035, almost 30% is in North America.

…. and there is much more at   http://www.worldenergyoutlook.org/media/weowebsite/2012/factsheets.pdf

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The Belfer Centre, by contrast, thinks the price of oil is going to fall 

http://belfercenter.ksg.harvard.edu/publication/22147/global_oil_production_is_surging.html

“Global Oil Production is Surging: Implications for Prices, Geopolitics, and the Environment”

BOTTOM LINES

  • Oil Production Growth is Global. Global oil output capacity is likely to grow from 93 million barrels per day today to 110 million barrels per day by 2020—the largest increase in a single decade since the 1980s. The surge in oil production capacity will occur almost everywhere, with the largest increases in Iraq, the United States, Canada, Brazil, and Venezuela.
  • United States Will Experience Unprecedented Output. Technological advances will increase the production of “unconventional” oil in the United States, which is in the midst of a shale boom. The Bakken/Three Forks formation in North Dakota alone has as much untapped shale/tight oil as a Persian Gulf country.
  • Oil Prices May Collapse. If oil prices remain at or above $70 per barrel, investments will sustain the 20 percent increase in oil production capacity by 2020. However, world demand is sluggish due to the lagging economy and focus on energy efficiency. If these trends continue, we could see a significant dip—or even a temporary collapse—of oil prices.
  • Shifting Market Has Geopolitical Consequences. While the Western Hemisphere could become oil self-sufficient by 2020, Iraq’s oil output will also substantially increase as it stabilizes. China may escalate its competitive and political influence in the Persian Gulf and other oil-producing hotspots, including Canada, Venezuela, and possibly the United States.
  • Oil Boom Must Trigger Environmental Action. Enforcement of environmental regulation and major investment in emission-reducing technologies must accompany the development of unconventional oil. Without this balance between industry and environmental interests, new oil production projects will be stymied or delayed.
  • …… and there is more detail on these at
  • http://belfercenter.ksg.harvard.edu/publication/22147/global_oil_production_is_surging.html

The section on oil prices states:

Oil Prices May Collapse. Contrary to prevailing wisdom that increasing global demand for oil will increase prices, the report finds oil production capacity is growing at such an unprecedented level that supply might outpace consumption. When the glut of oil hits the market, it could trigger a collapse in oil prices.

While the age of “cheap oil” may be ending, it is still uncertain what the future level of oil prices might be. Technology may turn today’s expensive oil into tomorrow’s cheap oil. The oil market will remain highly volatile until 2015 and prone to extreme movements in opposite directions, representing a challenge for investors. After 2015, however, most of the oil exploration and development projects analyzed in the report will advance significantly and contribute to a shoring up of the world’s production capacity. This could provoke overproduction and lead to a significant, steady dip of oil prices, unless oil demand were to grow at a sustained yearly rate of at least 1.6 percent trough 2020.

 

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The IEA (International Energy Agency website) says:

Where does the IEA stand in the peak oil argument?

Our analysis suggests there are ample physical oil and liquid fuel resources for the foreseeable future. However, the rate at which new supplies can be developed and the break-even prices for those new supplies are changing. Global oil production levels are also dependent on the production policy of OPEC, which holds between one and six million barrels per day of spare capacity in reserve. Declining oil production in any given year can occur for one of several reasons unrelated to peak production, including OPEC production decisions, unplanned field stoppages and the impact of earlier investment decisions by the oil industry. A combination of sustained high prices and energy policies aimed at greater end-use efficiency and diversification in energy supplies might actually mean that peak oil demand occurs in the future before the resource base is anything like exhausted.

http://www.iea.org/aboutus/faqs/oil/

 

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The Oil Drum website at  http://www.theoildrum.com/node/9622   states:

The International Energy Agency (IEA) provides unrealistically high oil forecasts in its new 2012 World Energy Outlook (WEO). It claims, among other things, that the United States will become the world’s largest oil producer by around 2020, and North America will become a net oil exporter by around 2030.

 

 

Figure 1. Author’s interpretation of IEA Forecast of Future US Oil Production under “New Policies” Scenario, based on information provided in IEA’s 2012 World Energy Outlook.
 

Figure 1 shows that this increase comes solely from the expected rise in tight oil production and natural gas liquids. The idea that we will become an exporter in later years occurs despite falling production, because “demand” will drop so much.

The oil price forecasts underlying these and other forecasts in the report are approximately as follows:

 

 

Figure 2. Author’s interpretation of future average world oil prices, as provided by IEA in their 2012 WEO report. (Forecast provided by IEA is more “concave downward”.) Historical amounts are based on BP 2012 Statistical Review of World Energy amounts.
 

One reason the WEO 2012 estimates are unreasonable is because the oil prices shown are unrealistically low relative to the production amounts forecast in the report. This seems to occur because the IEA misses the problem of diminishing returns. As the easy-to-produce oil becomes more depleted, and we need to move to more difficult reservoirs, the cost of extraction increases.

In fact, there is evidence that the “tight” oil referenced in Exhibit 1 is already starting to reach production limits, at current prices. The only way these production limits might be reasonably overcome is with higher oil prices–much higher than the IEA is assuming in any of its forecasts.

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Why Light Tight Oil Won’t Increase as in Figure 1

Tight oil, also referred to as “shale oil,” is supposed to be the United States’ oil savior, if we believe the IEA. The Bakken and Eagle Ford plays are the best known examples.

Rune Likvern of The Oil Drum has shown that drilling wells in the Bakken already seems to be reaching diminishing returns. The choicest locations appear to have been drilled first, and the locations being drilled now give poorer yields. He has also shown that the average well in the Bakken now requires a price of $80 to $90 barrel, which is close to the recent selling price. If increased production is desired, the price of oil will need to start increasing (and keep increasing) to provide the incentive needed to drill wells in less-choice location.

There are other issues as well. If there is a need to drill an increasing number of wells just to stay even, or an even larger number, to increase the amount of oil produced, we start to reach limits on many kinds: number of rigs available, number of workers available, miles driven for water to be used for fracking. Perhaps the issue that will limit production first, though, is limits on debt available to producers. Rune Likvern has also shown that cash flows from tight oil extraction tend to run “in the red,” so an increasing amount of debt financing is needed as operations ramp up. At some point, companies hit their credit limit and have to stop adding new wells until cash flow catches up.

….. and there is much  more detail at  http://www.theoildrum.com/node/9622

 

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IATA data on the price of jet fuel:

Taking a look at the price action over the past six months:

Jet fuel price index history

Taking a longer term perspective of price movements:

Crude & jet fuel price history