Thursday, June 2, 2011

World oil price and production trends



The world oil price is represented in AEO2011 as the price of light, low-sulfur crude oil delivered at Cushing, Oklahoma. Projections of future supply and demand are made for “liquids.” The term “liquids” refers to conventional petroleum liquids, such as conventional crude oil, natural gas plant liquids, and refinery gain, in addition to unconventional liquids, such as biofuels, bitumen, coal-to-liquids (CTL), coal- and biomass-to-liquids, gas-to-liquids (GTL), extra-heavy oils, and oil shale (derived from kerogen).

World oil prices are influenced by a number of factors, some of which have mainly short-term impacts. Others, such as expectations about world oil demand and OPEC production decisions, affect prices in the longer term. Supply and demand in the world oil market are balanced through responses to price movements, and the factors underlying expectations for supply and demand are both numerous and complex. The key factors determining long-term expectations for oil supply, demand, and prices can be summarized in four broad categories: the economics of non-OPEC conventional liquids supply; OPEC investment and production decisions; the economics of unconventional liquids supply; and world demand for liquids.

In 2010, the “prompt month contract” for crude oil (the contract for the nearest month’s trading) remained relatively steady from January to November, at a monthly average between $74 and $84 per barrel (2009 dollars), before increasing to just over $89 per barrel in December [44].

Long-term prospects

In past AEOs, High Oil Price and Low Oil Price cases have been used to explore the potential impacts of changes in world liquids supply on world (and U.S.) oil markets as a result of either OPEC production decisions or changes in economic access to non-OPEC resources. In AEO2011, the High Oil Price and Low Oil Price cases have been expanded to incorporate alternative assumptions about liquids supply, economic developments, and liquids demand as key price determinants. The assumed price paths in the AEO2011 High and Low Oil Price cases bracket a broad range of possible future world oil price paths, with prices in 2035 (in real 2009 dollars) at $200 per barrel in the High Oil Price case and $50 per barrel in the Low Oil Price case, as compared with $125 in the Reference case (Figure 13). This is by no means the full range of possible future oil price paths.

Reference case

The global oil market projections in the AEO2011 Reference case are based on the assumption that current practices, politics, and levels of access will continue in the near to mid-term. The Reference case assumes that continued robust economic growth in the non-OECD nations, including China, India, and Brazil, will more than offset relatively tepid growth projected for many OECD nations. In the Reference case, non-OECD liquids consumption is about 25 million barrels per day higher in 2035 than it was in 2009, but OECD consumption grows by less than 3 million barrels per day over the same period. Total liquids consumption grows to 103 million barrels per day by 2030 and 111 million barrels per day by 2035.

The AEO2011 Reference case assumes that limitations on economic access to resources in many areas restrain the growth of non-OPEC conventional liquids production over the projection period and that OPEC production meets a relatively constant share of about 40 percent of total world liquids supply. With those constraining factors, satisfying the growing world demand for liquids in coming decades requires production from higher cost resources, particularly for non-OPEC producers with technically challenging supply projects. In the Reference case, the increased cost of non-OPEC supplies and a constant OPEC market share combine to support average increases in real world oil prices of about 5.2 percent per year from 2009 to 2020 and 1.0 percent from 2020 to 2035. In 2035, the average real price of crude oil in the Reference case is $125 per barrel in 2009 dollars.

Increases in non-OPEC production in the Reference case come primarily from high-cost conventional projects in areas with inconsistent fiscal or political regimes and from increasingly expensive unconventional liquids projects that are made economical by rising oil prices and advances in production technology (Figure 14). Oil sands production in Canada and biofuels production mostly from the United States and Brazil are the most important components of the world’s unconventional resources, accounting for nearly 70 percent of the projected incremental supply between 2009 and 2035 in the Reference case.




Low Oil Price cases

In earlier AEOs, the Low Oil Price case assumed that significantly improved access to resources and the willingness of OPEC members to increase their market share would result in low prices and ample supplies, leading to strong increases in demand over the long term. For AEO2011, the Low Oil Price case has been changed to one in which relatively low demand for liquids, combined with greater economic access to and production of conventional resources, results in sustained low oil prices. In particular, the new Low Oil Price case focuses on demand in non-OECD countries, where uncertainty about future growth is much higher than in the OECD nations. The AEO2011 Low Oil Price case assumes that world oil prices fall steadily after 2011 to about $50 per barrel in 2030 and stabilize at that level through 2035, and that relatively low gross domestic product (GDP) growth in the non-OECD countries, compared to the Reference case, keeps their liquids demand at relatively low levels. Average annual GDP growth in the non-OECD nations is assumed to be 1.5 percentage points lower than in the Reference case, or about 3.6 percent on average. The result is that non-OECD demand for liquids in 2035 is 15 million barrels per day lower than would have been projected in previous AEOs, as represented in the AEO2011 Traditional Low Oil Price case. Total world liquids consumption rises to only 108 million barrels per day in 2035 in the AEO2011 Low Oil Price case.

In both the Low Oil Price case and the Traditional Low Oil Price case, low prices limit the development of relatively expensive unconventional supplies. Thus, the volumes of unconventional production supplied are the same in the two cases (Figure 15). Similarly, there is only a modest difference between the volumes of non-OPEC conventional liquids supplies in the two cases. In contrast, OPEC conventional liquids supplies, which increase by about 28 million barrels per day in the Traditional Low Oil Price case, increase by only about 15 million barrels per day in the Low Oil Price case.

High Oil Price cases

In the AEO2011 High Oil Price case, high demand for liquids, combined with more constrained supply availability, results in a sharp, continued increase in world oil prices. As in the Low Oil Price case, GDP growth is used as a proxy for liquids demand growth in the non-OECD nations. Annual GDP growth in non-OECD nations is assumed to be 1.0 percentage points higher in the High Oil Price case than in the Reference case, or 5.7 percent on average. Coupled with more constrained supply, oil prices increase to $200 per barrel in 2035 as a consequence. Despite the higher prices, however, total world liquids consumption grows to 115 million barrels per day in the High Oil Price case, or 4 million barrels per day higher than in the Reference case. In contrast, in the Traditional High Oil Price case, only world liquids supply strategies are assumed to result in higher oil prices and tight supplies, which constrain increases in demand over the long term.

In both the High Oil Price case and the Traditional High Oil Price case, high prices and restrictions on the production of lower cost conventional liquids encourage the development of relatively expensive unconventional supplies. The outlook is similar in the two cases, with about 20 million barrels per day of unconventional resources brought to market in 2035. Non-OPEC liquids supplies are slightly higher in the High Oil Price case than in the Traditional High Oil Price case, but the largest difference between the two cases is in conventional OPEC supplies. The High Oil Price case assumes that OPEC will increase production to maximize revenues, because demand in non-OECD nations is not dampened by high prices. In this case, OPEC conventional liquids supplies increase by almost 8 million barrels per day from 2009 to 2035, as compared with a decline of 2 million barrels per day in the Traditional High Oil Price case.

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