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Top 5 conclusions on The Price of Oil
Oil price developments over the past 40 years have been truly spectacular, but we believe the period of excessively high prices has come to an end. We discuss these trends in our new book, The Price of Oil. Some major findings are provided below:
- Oil prices rose by almost 900% between 1970-72 and 2011-13. This can be compared with a 68% increase for a metals and minerals price index, comprising a commodity group that, like oil, is exhaustible. In our view, it is political rather than economic forces that have shaped the inadequate growth of oil production capacity, the dominant factor behind the sustained upward price push.
- The shale oil revolution has turned the long declining oil production trend in the US into a rise of 73% between 2008-2014. Geologically, the US does not stand out in terms of shale resources. Given the mainly non-proprietary shale technology, it is inevitable that the revolution will spread beyond the US. We have assessed the prospects of non-US shale oil output in 2035, positing that the rest of the world will by then exploit its shale resources as successfully as the US has done in the revolution’s first ten years. This would yield rest of world output of around 20 million barrels per day (mbd) in 2035, which is similar to the global rise of all oil production in the preceding 20 years.
- Another related revolution is beginning to see the light of the day, but news about it has barely reached the media. It is being gradually realized that the advancements in horizontal drilling and fracking can also be applied to conventional oil extraction. If the rest of the world applies these techniques to conventional oil, as the US has done, this would yield a further addition of conventional oil amounting to 20 mbd by 2035.
- The oil output increases are bound to put downward pressure on prices, either by preventing price rises from 2015 levels, averaging some US$55 per barrel, or by pushing them back to these levels if an early upward reaction takes place. Our optimistic scenario, which appears increasingly likely, sees a price of US$40 by 2035. The price implications of the revolutions will in turn influence many other conditions that shape human life, be they economic, political, diplomatic or military.
- The technologies involved in the oil revolutions will have an equal bearing on the global production of natural gas. This will result in falling long-term gas prices, as is apparent from the US experiences so far. The decline of gas prices in that country has resulted in a wholesale decommissioning of coal fired power facilities and their replacement by plants run on gas. This has reduced US CO2 emissions to levels not seen since 1994. Similar emission reductions can be expected across the world, as cheaper and cleaner gas replaces coal in power generation, representing a climate benefit of the revolutions.
Gastech News: What to expect in 2016?
Roberto F. Aguilera: We expect an oil price range of $40 to $60/bl in 2016, which will be the result of resilient and likely growing supply (e.g. from US shale, Canada, Iran), combined with quite suppressed demand as the world economy grows slowly and China's development strategy shifts towards a less materials intensive mode.
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