When we look at oil market projections for OECD Europe for the next two decades, one clear message emerges – the huge and growing difference between oil demand and supply within the region.
According to our projections, demand of 15.6million barrels/day (mb/d) in 2005 is set against supply of 6.1mb/d. Over the next 20 years, while demand will continue growing – albeit very slowly – to 16.3mb/d, supply will fall – and fall heavily – to 3.3mb/d in 2025.
Put another way, while supply now accounts for 39percent of demand, in 20 years' time it will be down to just over half this proportion, 20percent. Inevitably there will be a greatly increased reliance on outside sources of oil.
The situation is much more acute in China and non-OECD Asia. In China, according to our reference case scenario, average annual oil demand will double in the next two decades, from 6.7mb/d now to 13.4mb/d in 2025. But supply will remain the same at 3.5mb/d. In Asia, excluding the Middle East, demand will more than double in the same period, from 7.4 to 15.5mb/d, and supply will actually dip slightly, from 2.5 to 2.4mb/d.
Globally our projections show a strong rise in world oil demand over the next two decades, from 81mb/d now to 115mb/d in 2025, but only a small increase in non-OPEC supply in the same period, from 51 to 56mb/d.
So the world will come to rely much more heavily upon OPEC oil in the future, since its member countries hold around four-fifths of proven global crude oil reserves.
However, there should be plenty of oil around for decades to come. It is OPEC’s firm view that there is still plenty of oil that has yet to be discovered, in regions whose geological structures suggest a high probability of commercially viable reserves. This is particularly true for OPEC areas.
In contrast, while the international oil companies were reporting, not so long ago, that they were able to add to new reserves in non-OPEC areas at a greater rate than the depletion of existing ones, this no longer appears to be the case.
Also, it must be remembered that the current share of crude oil in total oil supply is around 84percent, with the rest consisting mainly of synthetic crudes, processing gains and non-crudes such as natural gas liquids. However, over the next ten years, in spite of the continuing forward march of technology, no dramatic change is expected.
OPEC’s member countries will, therefore, need to expand their oil production capacity to meet the extra demand for crude. The scale of investment required for this will run into many billions of dollars in the coming decades, although, globally, it will not be very different to past investment.
Nevertheless, the exact magnitude is subject to large uncertainties in the shape of, for example, future economic growth rates, consumer government policies and technological advances. To explain the significance of this, let me point out that, if economic growth turns out to be just one per cent lower than what is assumed in our reference case, by 2010 an estimated uncertainty of nearly US$25billion for required OPEC investment will have emerged.
Moreover, it can prove very costly if we do not get our sums right. Over-investment may result in excessive, idle capacity, while under-investment may lead to a crude shortage. Both cases could create serious price volatility.
Now, for those people who feel uncomfortable about the size of OPEC’s role in all of this, especially with regard to the so-called battle for energy dominance, let me state the following: market order and stability are as much in the interests of producers as they are of consumers.
This is especially the case for producers from the developing world. The economic fortunes of OPEC’s member countries are heavily dependant upon their oil revenues.
Furthermore, OPEC recognises the powerful symmetry that exists in the oil market, in that a steady, predictable inflow of oil revenues now contributes towards providing the funds required for investment in future oil production capacity, to enable secure, stable supplies for consumers in the years ahead. This, in itself, should dismiss the idea of a battle for energy dominance. Also, the international community is increasingly aware of the importance of stabilising the prices of all primary commodities to avoid harmful volatility.
There is a pressing need, therefore, to maintain order and to stabilise prices, so as to ensure efficiency and security of supply, both for now and the future. In reaching our agreements in a transparent manner and after careful consideration of the prevailing market outlook we have the welfare of both producers and consumers in mind, as well as that of the global economy at large. So all responsible parties in the market stand to benefit from their success.
On the other hand, we are not miracle-workers. Oil prices are – and will remain – subject to a wide range of influences, and some of these are highly unpredictable in nature and beyond OPEC’s control. Again I refer to 2004 when, as a result of this, OPEC’s market-stabilisation measures were less effective than usual. However, we are constantly monitoring market developments, and the many years of experience we have had in the oil market have enhanced our ability to respond to sudden, unexpected turns of events in a timely and appropriate manner.
Nevertheless, to achieve the maximum effectiveness in this, we require the full co-operation and support of the other leading parties in the industry. There has been much welcome progress in this regard in recent years, on both a bilateral and multilateral basis.
Recent record high prices can be put down mainly to a number of factors: continued strong oil demand, led by a solid world economic performance; the late and lasting cold spell in the northern hemisphere; increasing market anxiety over forward capacity tightness, coupled with geopolitical tensions; and the expectation of the strong demand outstripping non-OPEC supply growth in the medium term.
The resultant bullish bias has been exacerbated by the rising activity of non-commercials, in particular pension and index funds, leading to further upward price spirals.
Nevertheless, global oil supply – particularly OPEC output – remains adequate to meet expected demand. Indeed, supply was ahead for most of 2004, resulting in a tangible OECD stock-build that continues in the second quarter of 2005.
Our latest forecasts show average annual world oil demand rising by 1.9mb/d to 84.0mb/d in 2005. However, non-OPEC supply – which includes OPEC natural gas liquids and non-conventional oils in this analysis - will not keep pace with this, with a projected increase of only 1.2mb/d, to reach an average of 54.9mb/d. This means that there will be a difference of 29.1mb/d for OPEC crude to fill.
During the course of this year, average OPEC production capacity is expected to rise to 32.7mb/d, as additional projects are brought on-stream, including those that began at the end of 2004, in response to the tight market conditions. Indeed, the bulk of this is expected to be ready by the second half of 2005, and it includes a range of light, medium and heavy crudes.
In proportionate terms, OPEC’s spare capacity, which, at one stage, dipped to around five per cent in 2004, now stands at more than 2mb/d, or 8percent, and is expected to exceed 3mb/d by year-end. So we should be looking at spare capacity levels of around 10percent – interestingly, this reflects the experiences of much of the past ten years or so.
Peering a bit further ahead, OPEC is committed to expanding capacity above this level, and present expectations are for the addition of another 3.5–4.0mb/d between 2006 and 2010.
This should allow prices, overall, to continue to moderate, as the oil market returns to a situation of improved stability, such as we had earlier in this decade. And, while it is difficult to know, at present, the corresponding price range for the short-to-medium term, I believe we are likely to see the price of OPEC’s reference basket settling above a minimum of US$30/b – to ensure adequate investment – but below the level that would begin to have an impact on global economic growth or induce irreversible and undesirable policy-response measures.