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Long-term oil price assumptions
Last modified on 06 June 2011 at 11:28
Over the longer term, oil prices are expected to rise in real terms as the market power of OPEC producers, particularly those in the Middle East, increases.
Real oil prices are forecast to be around 76% higher by 2012 than their average level in 2009 as the sharp reduction experienced between 2008 and mid-2009 is reversed. As a result, nominal oil prices are expected to average around $115 pb in 2011 and remain broadly at that level in 2012 as world economic growth remains fairly robust and oil demand continues to grow moderately.
The IMF's assessment in the April 2011 World Economic Outlook suggests that, in the medium term, the trend in oil prices will depend in part on how strongly supply responds to the recovery in global demand. Even assuming that the supply disruptions currently affecting the Middle East and North Africa (MENA) are short-lived, oil prices are expected to remain high because of the tension between the continuation of robust growth in oil demand driven by the emerging market economies, principally China and India, and the reduction in the long-term trend rate of growth of world oil production. This is because the persistent increase in oil prices over the past decade suggests that global oil markets have entered a period of scarcity and a return to abundant oil supplies at relatively low prices in the near term is unlikely. If this tension intensifies, whether from stronger growth in oil demand, supply disruptions of the type experienced in the past, or setbacks to the expansion in global supply capacity, market clearing to balance supply with demand could lead in future to surges in oil prices as occurred in 2007-08.
Model-based simulation analysis undertaken by the IMF suggests that the impact of increased oil scarcity on world economic growth could be relatively minor, if it primarily involves a gradual reduction in the trend rate of growth in oil supply rather than an absolute decline in output. In particular, a 1 pp reduction in the trend growth in oil supply appears to reduce world economic growth by less than a ¼% pa over the medium and longer term. However, a persistent decline in global oil supply levels could have sizeable negative effects on global output, even if there is a greater degree of substitutability between oil and other primary energy sources. At the same time, in the medium term, the wealth transfer from oil importers to exporters arising from an increase in oil prices could increase capital flows, reduce real interest rates and widen current account imbalances, posing a risk to world economic growth.
Over the medium to longer term, the IEA 2010 World Energy Outlook (WEO) also expects the upward pressure on oil prices to resume in the Current Policies Scenario (formerly known as the Reference Scenario), because of rising demand, particularly in non-OECD countries, as world economic growth accelerates and the marginal costs of supply rise. However the 2010 WEO places more emphasis on the New Policies Scenario as a central view because:
- it takes account of broad policy commitments and plans to tackle environmental or energy security concerns that have already been announced but not implemented by countries around the world;
- assumes a cautious implementation of national pledges under the Copenhagen Accord to reduce greenhouse gases by 2020 and to reform the fossil-fuel subsidies that are prevalent in many developing economies.
The prices needed to balance the oil market over the longer term differ markedly between these two scenarios due to the growing insensitivity of demand and supply to changes in price. On the demand side, all the increase in both scenarios over the period to 2035 comes from non-OECD countries led by China and India where economic growth remains rapid and transport demand becomes dominant while OECD demand declines.
On the supply side, IEA analysis suggests that the rate of increases in oil production capacity is also relatively unresponsive to price changes, because net additions to global capacity are constrained by the steep decline in output from existing oil fields, particularly in non-OPEC countries, problems of access to undeveloped resources and logistical constraints. As a result, OPEC production rises continually to 2035 in the New Policies Scenario, with its share in global output increasing from 41% at present to 52%. Meanwhile, non-OPEC output is expected to be broadly constant at around 49-50 mbd up to around 2025, as increasing production of natural gas liquids (NGLs) and unconventional production offset the decline in that of crude oil; thereafter output is expected to fall.
Against this background, the IEA expects real oil prices to rise steadily over the next 25 years in the New Policies Scenario, reflecting higher production costs. However if the policy changes are not implemented, the Current Policies Scenario suggests that much higher real oil prices will be needed over the longer term to balance supply with the faster growth in demand led by the emerging economies. Over 2015-25, this implies an increase in real oil prices of around 1½% pa in the New Policies Scenario, with a more rapid rise of around 2½% pa in the Current Policies Scenario (ie if the policy changes assumed by the IEA do not materialise).
In the longer term to 2025, real oil prices are expected to rise in our forecast by around 2% pa, as global dependence on OPEC supplies increases while the decline in non-OPEC production is moderated as lower supplies of oil and natural gas liquids are partially offset by higher output from non-conventional sources and the demand for oil, led by developing countries, continues to grow.