The Outlook for Oil According to OPEC

This year's World Oil Outlook (WOO) from OPEC gives us insight into where the world's only oil producing cartel thinks the world's oil market is headed over the coming years and decades.  Here are a few highlights.

The WOO opens by noting that the economic status of the world is particularly fragile, even three years after the supposed end of the 2008 - 2009 recession; this uncertainty makes it difficult to project where the oil market is headed.  OPEC suggests that, over the medium-term, oil prices will average $100 per barrel, rising with inflation to reach $120 in 2025 and $155 in 2035.  This forecast takes into account the effects of natural production depletion, the cost of producing oil in more remote and challenging terrain and the impact of technological changes.

What issues will impact the consumption and production of oil over the medium- and long-term?

1.) The situation in Europe: Economic growth in 2012 is expected to be flat, rising to only 0.5 percent in 2013.  With Europe contributing one-fifth to the world's GDP, it is obvious that the demand for oil will drop or remain level when the economy is flat.

2.) Growth in the Global Population: While the world's population is expected to rise from 6.9 billion in 2010 to 8.6 billion in 2035, the demographics of the population will change.  The increase in population comes mainly from two countries, China and India with India overtaking China as the world's largest nation in 2022.  What will change is the size of the labour force in the two nations as shown on this graph:

China's working age population will begin to decline in the next three years while India's continues to grow out to 2035.  This will have a strong impact on the ability of China to continue to grow its economy and will ultimately impact the long-term demand for oil by both nations.

3.) Growth in Energy Demand: Between 2010 and 2035, energy demand is expected to rise by 54 percent.  Fossil fuels currently make of 87 percent of energy used and this is expected to drop to a still substantial 82 percent by 2035.  Oil's share in 2010 was 35 percent and is projected to fall to 27 percent by 2035 with natural gas and coal making up the difference.  Here is a bar graph showing the supply of  various forms of energy over the next 25 years:

Here is a bar graph showing the evolution of energy demand by fuel type over the next 25 years, comparing OECD vs. Non-OECD demand for each form:

4.) Growth in Shale Gas Production: The shale gas sector is in its infancy and is primarily located in the continental United States and Canada.  American shale gas production jumped from 15 BCF per day in 2010 to 25 BCF per day in 2012.  Currently, it is anticipated that shale gas will primarily be used as a replacement for coal in the generation of electricity.  Many questions are still unanswered about the environmental impact of fracking and the steep production declines associated with shale gas production.

5.) The Use of Coal: While coal energy reserves outstrip oil and gas by a wide margin with the reserves to production index standing at 120 years, down from 200 years a decade ago, environmental issues weigh heavily against its use.  Despite that, over the last 10 years, the use of coal as a fuel grew the fastest of the three fossil fuels.  Here is a map showing the distribution of the world's coal reserves:

6.) Growth in the Production of Non-OPEC Oil: Between 2022 and 2016, production of oil from Canada's oil sands, U.S. shale oil and oil from Brazil and the Caspian will add 4 million BOPD to the world's non-OPEC oil supply.  Shale oil production from the Bakken, Eagle Ford and Niobrara in the United States is already in excess of 1 million and, despite steep production declines, by 2020, OPEC estimates that shale oil production rates could reach 2 million BOPD, rising to 3 million BOPD by 2035  after which production growth will slow as fewer "sweet spots" remain to be exploited.  Offsetting this increased production are production declines of roughly 1 million BOPD from Europe and Mexico.

7.) Growth in the Production of OPEC Natural Gas Liquids:  Between 2011 and 2016, OPEC's production of NGLs is expected to rise by 1.2 million BOPD to 6.4 million BOPD.

When all of these factors are combined, we end up with this supply projection:

Note that total non-OPEC production grows by 10 million BOPD over the 25 year period and OPEC production grows by 5.6 million BOPD over the same time frame.  OPEC projects that the amount of OPEC crude required over the medium-term will stay essentially flat and that the cartel's crude oil spare capacity will exceed 5 million BOPD as early as 2013/2014.

Oil demand is expected to rise by over 20 million BOPD between now and 2035, reaching just over 107 million BOPD in 2035.  China, India and other Asian nations account for 87 percent of this growth in demand with OPEC, the Middle East, Latin America and Africa making up the balance.  By 2035, demand from Asia alone will reach 90 percent of the demand by all OECD nations.  Here is a chart showing what oil demand by region looks like in 5 year increments:

One interesting note is contained in the first part of the WOO.  By 2035, China's economy will be larger than that of the United States and Europe and India's economy will be larger than the entire OECD Asia-Pacific region.  While the United States and Europe are reducing their overall consumption of energy through increased energy efficiencies, particularly in the case of oil, it will become apparent that these energy savings will likely be dwarfed by increased demand from both China and India as shown on this bar graph:

This year's World Oil Outlook gives us a fascinating look at where OPEC thinks the world's oil markets are headed.  While there is nothing terribly concerning about their projections, we already know that the world's oil traders don't necessarily trade based on fact, rather, as we saw in 2008 and 2009, oil price volatility can be a completely irrational thing, based on absolutely nothing.  When oil prices swing between $35 and $145 a barrel over a 5 month period as shown on this chart, we know that the ultimate market price bears no relationship to the supply and demand of the commodity: