An underlying growth in global supply capacity, which is significantly outstripping demand, may mean that the world has now passed the peak price for oil, a report commissioned by Gaffney, Cline and Associates (GCA) suggests.
The report, released just days before OPEC meets to consider its response to falling prices, and a recent dip below $80 per barrel, states the current imbalance in supply and demand could lead to intensified price competition among the major producing nations in the coming years.
“Due to rapid demand growth from developing industrial economies such as China and a plethora of geopolitical disturbances there has been a five fold increase in oil prices since 2000. Both factors continue to weigh on markets and it is tempting to assume that further price inflation in the medium to long term is inevitable,” says the report’s author, energy finance expert and former GCA director Barry Aling.
“However, there is growing evidence that the more recent decline in prices reflects transformational changes in the pattern of global energy supply and demand which may mean that the price of $145.61, achieved in July 2008, proves to be a watershed high point for a commodity that so dominated global economic development in the 20th century.”
The report says since the first oil shock of the 1970s the global economy has succeeded in reducing relative oil dependency through a combination of advances in areas such as engine technology and the substitution of coal, gas and renewables for oil in key sectors including power generation.
This process appears likely to accelerate in the coming decades as the transport sector in particular adapts to “greener” alternatives such as bio-fuels and gas or electric vehicles.
However, the search for new oil reserves has continued to expand with major offshore discoveries in Brazil and elsewhere coinciding with a significant expansion in OPEC capacity, notably from Iraq and Saudi Arabia.
The “game-changer” however, has been the dramatic growth in the development of unconventional resources from North American “tight oil” formations, which have added approximately 5MMbbl/d to global output in just six years.
As a result, despite a significant reduction in Libyan production resulting from its recent political upheaval, oil prices have softened by nearly 30% in 2014 as markets adjust to the changing dynamics of supply and demand.
“Whereas in the past, a few OPEC countries, led by Saudi Arabia, have been prepared to act as ‘swing producers’ at times of excess supply, the scale of global capacity, coupled with the increasing budgetary pressures of all OPEC members, may herald a new era in which pricing power shifts decisively to buyers rather than sellers,” says Aling.
“In such a scenario, and even with oil prices at around $80 per barrel, the economic imperative to maximize oil production will take priority and render any accommodation or ‘pain-sharing’ among producers much less likely than in the past.
“These are the ingredients of a price war and the presence of significant excess capacity could presage a prolonged period of sub-$100 oil prices.”
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