Don't Count Oil Out Yet

04/03/2013 7:00 am EST


Oil is set to fall in price in the near term, but is still forecast to lead the world energy mix through at least 2040, writes April Yee of The National.

Oil producers used to cushy prices of $110 to $120 a barrel will soon have to brace themselves for leaner times, analysts predict.

Many expect the oil price, boosted in the past two years by the Arab Spring and the West-Iran nuclear standoff, to undergo a correction by the middle of this year. Current prices cannot solely be explained by the dynamics of supply and demand, says the International Energy Agency, the developed countries' energy watchdog.

Regional national oil companies are preparing for a dip. Citigroup foresees oil prices dropping by the end of the decade to between $80 and $90 a barrel.

"Oil demand growth may be topping out much sooner than the market expects," Citi analysts said in a research note last month. "The structural bull market of the previous decade was a result of surging global oil demand and consistently disappointing non-OPEC supply growth, compounded by a collapse in Iraqi and Venezuelan production. The outlook for each of these factors has now reversed."

Citi's bearish outlook can be put down to three phenomena—gas, gas, and more gas. A burst of natural gas from previously untappable shale formations in the United States has pushed down prices in North America, and made it economical to replace coal and even oil with the cleaner fuel.

As environmental policies gain teeth there and in the rest of the world, natural gas will get a long-term boost. Among clean energies, it competes with nuclear, which faces public acceptance difficulties and high upfront cost issues, and renewables, which have similar installation cost hurdles.

Advances in fuel efficiency for new cars of 2.5% a year will help to further cut demand for oil, says Citi.

In the industrial sector, gas-derived ethane can replace oil-based naphtha in petrochemical production, says Citi. These factors, together with increases in global oil supply coming from Iraq and non-OPEC producers, will help to bring together the prices of oil and natural gas, which even at Asian spot liquefied natural gas prices of $17 per million British thermal units still trades at a substantial discount to crude.

But do not expect to see the beginning of the end of oil yet. In its latest forecast, ExxonMobil (XOM) warned of the transformative nature of technology, and how hard it can be to see the ground shifting.

The shale gas revolution, as those in the industry love to call it, was made possible by the development of hydraulic fracturing technology, and quickly made expensive gas import terminals on the US coastline redundant.

The same technology is helping to unlock more oil from American fields. ExxonMobil expects oil to retain the lead in the world energy mix through 2040. Natural gas will overtake coal as the second-top source, while nuclear and renewables will continue to expand.

That will be made possible by rapid growth in energy demand—and in particular, electricity demand.
Developing countries are forecast to need 150% more electricity in 2040 than today. Overall, the world is expected to require 85% more.

Overall energy demand in developing countries will rise by 65% in that time, according to ExxonMobil, while global energy demand will increase by 35%. Growing trade in East Asia will boost transport fuel demand.

The increasing need for fuel is driven by growing prosperity and a forecast jump in the world's population from 7 billion to 9 billion, with the growth concentrated in Africa and India. "Evolving demand and supply patterns will open the door for increased global trade opportunities," ExxonMobil wrote in its annual prediction.

"Around 2030, the nations of North America will likely transition from a net importer to a net exporter of oil and oil-based products. The changing energy landscape and the resulting trade opportunities it affords will continue to provide consumers with more choices, more value, more wealth, and more good jobs."

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