OPEC says a $10 trillion investment is needed to prevent a massive spike in oil prices

OPEC says that $10 trillion worth of
investment will need to flow into oil and gas
through 2040 in order to meet the world’s
energy needs.
The OPEC published its World Oil Outlook
2015 (WOO) in late December, which struck a
much more pessimistic note on the state of
oil markets than in the past. On the one hand,
OPEC does not see oil prices returning to
triple-digit territory within the next 25 years, a
strikingly bearish conclusion. The group
expects oil prices to rise by an average of
about $5 per year over the course of this
decade, only reaching $80 per barrel in 2020.
From there, it sees oil prices rising slowly,
hitting $95 per barrel in 2040.
Long-term projections are notoriously
inaccurate, and oil prices are impossible to
predict only a few years out, let alone a few
decades from now. Priced modeling involves
an array of variables, and slight alterations in
certain assumptions – such as global GDP or
the pace of population growth – can lead to
dramatically different conclusions. So the
estimates should be taken only as a reference
case rather than a serious attempt at
predicting crude prices in 25 years.
Nevertheless, the conclusion suggests that
OPEC believes there will be adequate supply
for quite a long time, enough to prevent a
return the price spikes seen in recent years.
Part of that has to do with what OPEC sees
as a gradual shift towards efficiency and
alternatives to oil. The report issued estimates
for demand growth five years at a time, with
demand decelerating gradually. For example,
the world will consume an extra 6.1 million
barrels of oil per day between now and 2020.
But demand growth slows thereafter: 3.5 mb/
d between 2020 and 2025, 3.3 mb/d for 2025
to 2030; 3 mb/d for 2030 to 2035; and finally,
2.5 mb/d for 2035 to 2040. The reasons for
this are multiple: slowing economic growth,
declining population rates, and crucially,
efficiency and climate change efforts to slow
consumption. In fact, since last year’s 2014
WOO, OPEC lowered its 2040 oil demand
projection by 1.3 mb/d because it sees much
more serious climate mitigation policies
coming down the pike than it did last year.
Of course, some might argue that even that
estimate – that the world will be consuming
110 mb/d in 2040 – could be overly
optimistic. Coming from a collection of oil-
exporting countries, that should be expected.
Energy transitions are hard to predict ahead
of time, but when they come, they tend to
produce rapid changes. Any shot at achieving
the world’s stated climate change targets will
require a much more ambitious effort. While
governments have dithered for years, efforts
appear to be getting more serious. More to
the point, the cost of electric vehicles will only
decline in real dollar terms over time, and
adoption should continue to rise in a non-
linear fashion. That presents a significant
threat to long-term oil sales.
At the same time, OPEC also issued a word of
caution in its report. While oil markets
experience oversupply in the short- to
medium-term, massive investments in
exploration and production are still needed to
meet demand over the long-term. OPEC
believes $10 trillion will be necessary over the
next 25 years to ensure adequate oil supplies.
“If the right signals are not forthcoming, there
is the possibility that the market could find
that there is not enough new capacity and
infrastructure in place to meet future rising
demand levels, and this would obviously have
a knock-on impact for prices,” OPEC
concluded. About $250 billion each year will
have to come from non-OPEC countries.

Source: Business insider