I think the latter. I now expect the oil price to fall substantially over the next decade. This will happen through a combination of: a) new sources of supply; b) slower growth in the demand for energy due to low global economic growth and better energy conservation; along with c) increased use of alternative energy sources (nuclear and renewables).
Conventional oil supply from Opec (Middle East, Latin America and west Africa) is rising at over 1% a year and will reach 34 million barrels a day by the end of the decade. Non-Opec supply (Canada, US, Russia, Brazil, Mexico) is expected to rise even faster.
This pick-up is driven by the sharp expansion of US ‘tight (shale) oil’. US crude oil production has doubled from about 5mbd in 2007 to 9mbd now, back to its 1970 historic high. Brazil too will exploit new offshore discoveries to take annual production up to 3mbd by 2020.
Much has been made of tight oil production becoming unprofitable at crude oil prices below $85 a barrel. However, technological developments continue and there are still plenty of shale reserves globally, so this breakeven point is likely to fall gradually over the rest of this decade. That will keep the pressure on Opec to allow the crude price to fall in the face of rising supply.
Another important contributor to this tipping point for non-Opec output could be Mexico. The ending of the 75-year state monopoly of Pemex will allow foreign investment to reverse the fall in output experienced over the past decade. By mid-2015 new exploration will be underway. Finally, we can expect shale oil output to start to come on stream outside the US, in places like Poland and China, supply not yet built into current estimates from the international agencies.
All the evidence is that world economic growth will be slower than before. This is prompted by weaker productivity growth in developed markets and lack of structural reform in the large emerging economies. With global productivity growth averaging about 1.5% a year and employment growth similar, then 3% to 3.5% annual real GDP growth could be the norm for the rest of this decade.
Then there is the impact of new technology and government policies to improve energy conservation in transport and power generation in the OECD countries and more vertical urban development in the emerging economies.
In north America the push for fuel efficiency in motor vehicles continues and will step up apace with the expansion of electric cars, buses and hybrids. Drive-time use by US households is plummeting. In Europe, governments continue to place high taxes on motor fuel while expanding public transportation, often non-oil.
At the same time, China and India are building most of the world’s new capacity in power generation plants, using the latest energy-efficient technology. China and India are urbanising fast, with 900 million of China’s population living in cities by the end of the decade. Vertical cities reduce transportation, and China is building skywards, moving away from heavy industry towards lighter industry and service sectors where energy demand is again less intense.
The switch to renewables (non-fossil fuel sources) is reaching a take-off point. Subsidies for renewables will double over the next 10 years, and the cost of renewable energy production is coming down rapidly. Also, natural gas supplies will become readily available across national borders as liquid gas production and exports enter a new stage.
The generation of electricity by households will rise, using wind or solar power and then contributing to the national grid, alongside a ‘smart grid’ that better manages power generation and consumption.
However, any serious disruption to supply due to war, terrorism and political upheaval could reverse the downward trend. This is no small risk. But I reckon that Opec supplies should not suffer. And most important, oil supply and alternative energy sources are steadily shifting away from political hotspots towards safe arenas such as north and Latin America.
It’s a new era for energy, with the main beneficiary being the US and the main losers Russia and the Middle East. Europe will be helped by less reliance on these sources of energy supply.