Low oil prices are shaking up the global oil industry. Will they stay low? For how long? And how low is low anyway? These are some of the crucial questions hanging over the global energy sector. We spoke to three experts and the IEA’s Executive Director Fatih Birol, who put the current market in perspective – and offer a view of the future. Some say we are in a fairly normal cycle. Others see fundamental changes coming.This article was first published in the November issue of World Energy Focus, the free monthly magazine, produced by Energy Post for the World Energy Council.



Has the world entered a protracted – perhaps even permanent – period of low oil prices? There are some market watchers who indeed believe this. Roberto F. Aguilera of Curtin University in Australia and Marian Radetzki of Luleå University of Technology in Sweden, authors of a brand-new book, “The Price of Oil”, don’t hesitate to proclaim that “the period of excessively high oil prices has come to an end”. More or less permanently: “Our optimistic scenario sees a price of $40 by 2035.”

The main reason for their bearish outlook is that they expect a “a large-scale global shale revolution”. “In our view”, says Aguilera, “the shale boom in the US is just a humble beginning. As it develops and expands internationally, it will have an overwhelming impact on global oil supply. Using simple and reasonable methodologies, we estimate that the shale revolution outside the US will yield an additional 20 million barrels per day (bpd) by 2035.”

The coming shale oil glut alone will be enough to keep prices in the doldrums

In addition, the two authors note that there is another revolution taking place, namely “the application of horizontal drilling and fracking to conventional oil formations in the world outside the US.” This technology, they say – which gets much less publicity than the shale one – will yield a further addition of 20 million bpd in the same period, summing up to a spectacular total rise of over 40 million bpd by 2035, equal to almost half of global oil output in 2014.

That’s just the supply side. Looking at the demand side, many observers see downward risks, mainly as a result of climate change (energy efficiency) policies and the growth of alternative transport fuels (electric cars, gas, biofuels). With supply exploding and demand contracting, could this be the End of the Oil Age – in the sense that oil would no longer rule the world?

Aguilera and Radetzki, however, do not go as far as that. “The cost of a deep climate policy is so high, and the confusions and inactions ever since the signature of the shallow Kyoto protocol in 1997 so pervasive, as to make us doubt that a severe policy will be launched”, says Aguilera. Nevertheless, Aguilera insists that the coming shale oil glut alone will be enough to keep prices in the doldrums.

Steeper decline rate

Not everyone shares their view. Fatih Birol, as of 1 September the Executive Director of the International Energy Agency (IEA), does believe that “oil demand growth will slow down”, although there will still be some growth. This slowdown on the demand side will take place regardless of economic growth, says Birol. “It will be mainly a result of energy efficiency measures.”

But, adds the man who until recently was Chief Economist of the IEA, and responsible for the IEA’s famous annual World Energy Outlook (WEO), this does not mean that prices will stay low. “We think for oil prices to stay at this price level much longer is rather unlikely.”

“Even if demand were to stay level, we will need huge investment in the oil sector”

There are several reasons for this, explains Birol. He notes that “even if demand were to stay level, we will need huge investment in the oil sector, mainly to replace existing fields that are in decline. This is because the natural decline rate of fields is becoming steeper.”

According to the latest WEO, published on 10 November, over the next 20 years some $650 billon needs to be invested each year to compensate for this decline. “This is equal to what until recently was needed both to compensate natural decline and meet demand growth.”

Hence, with so many projects currently being cancelled or delayed, it is very likely that prices will bounce back, according to Birol. “Just an example: if this price level continues for some years, US tight oil production would go down by 3 million bpd.” He notes that “many projects in the US make sense at around $60.”

What about the possibility that the US shale oil revolution will be exported to other parts of the world? Birol does not believe this is very likely to happen at a large scale. “There will be some limited production in some countries, e.g. Canada, and maybe a little bit in Russia or Latin America. But this won’t come close to what we have seen in the US.”

Reasonably normal

Cyril Widdershoven, who works as senior expert for MEA Risk, a private consultancy based in Florida, and the Dubai-based consultancy NAMEA Group, concurs with that assessment. “The shale oil revolution will not be exported across the world, certainly not at the prices we’re seeing now”, he says. “The circumstances in the US are better than anywhere else. Oil is found not too deep, close to market. There is a good infrastructure, a liberal ownership regime, enough water. This isn’t the case in most other places.”

“The international oil companies will be the dinosaurs of the 21st Century”

According to Widdershoven, who is a Middle Eastern specialist and has tracked oil markets for decades, we are going through a reasonably normal cycle. “Oil production increased for many years, then there was a financial crisis. Now production is taking a hit, while demand outside the OECD is still growing. So prices should go back up, under normal circumstances to some $55-60 at the end of next year.” Geopolitically one of the greatest uncertain factors is Iran, says Widdershoven. “If Iran is not coming back into the market, prices will increase even more.”

Looking at the longer term, it is no doubt true, says Widdershoven, that “at some point in the future demand may flatten out”. But, he adds, “it’s not going to happen now”. Admittedly, too, “if the world puts carbon pricing in place at COP21, there is a possible scenario that oil and gas will become too expensive. But most National Oil Companies I talk to do not believe their Governments will let that happen to them.”

This does not mean that the oil industry can sleep quietly, notes Widdershoven. The current market is especially painful to international oil companies (IOCs), like Shell, ExxonMobil and BP. The Dutch risk analyst says the IOCs may well be swallowed up – by the National Oil Companies, the NOCs. “I think the IOCs will be the dinosaurs of the 21st Century. The market will be dominated by NIOCs – National International Oil Companies. I am surprised that they have not put money on the table yet to buy the likes of Shell or BP.”

A new era

Ged Davis, Executive Chair of the World Energy Scenarios, the World Energy Council’s flagship study, takes a long-term view of oil market developments. He notes that there have been successive periods in oil market history ruled by different pricing mechanisms. “First there was the period when the Seven Sisters controlled prices. This led to large demand in the 1960s, when prices were about $20 a barrel in today’s money. Then OPEC took over. They became swing producer. They moved prices up to $60 and later even $100 in today’s terms.”

“What we are seeing today is almost certainly the beginning of a new price formation era”

These high prices, which lasted from the early 70s to the mid-80s, triggered a drastic reduction in demand growth thanks to “dramatic improvements in energy efficiency”, notes Davis. As a result, prices collapsed to around $30. This low price period lasted from about 1986 till 2004 and was followed by another period of high prices, partly thanks to strong Chinese demand. “Each period contains the seeds of its own destruction.”

According to Davis, who is also CEO of consultancy Forescene and in the past worked for the World Economic Forum and Shell, among others, what we are seeing today is “is almost certainly the beginning of a new price formation era”. He thinks prices are likely to stay around current levels for quite some time. “You can see now that the Iranian budget is coming in at $42-$50. The Russian government is budgeting at $50. This is not so dissimilar from what we saw in real terms from the mid-80s and into the 90s.”

So does Davis believe that eventually this period too will end in its own defeat – and prices will go back up? “Yes, eventually, as in other eras, prices will rise as a consequence of a cut back in higher cost oil projects and a boost to oil demand.” But longer term he does not rule out that oil market fundamentals will change fundamentally. Not just because of shale oil – he believes the US experience is fairly unique, although the opportunity for development exists in many countries. But there has been a vast improvement in productivity, which has lowered costs, particularly for shale oil production. In addition, electric vehicles could suddenly take off post-2020, especially because of air pollution concerns. “And what if substantive carbon pricing systems are put in place? One day, the industry may look very different.”

Editor’s Note

This article was first published by World Energy Focus, the monthly magazine, produced by Energy Post for the World Energy Council.You can register here to receive this magazine for free. The November issue includes an exclusive in-depth interview with Hoesung Lee, the new Chairman of the IPCC.