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Oil will be part of our lives for decades to come. But its value to the consumer has already topped out. Consider the long-term trend for oil prices. Futures markets hint at little concern about supply since the latest Middle East tension began in October.
Even one of the world’s largest producers might be rethinking things. Saudi Arabia’s energy ministry on Tuesday asked the state oil company Saudi Aramco to halt a planned 1mn barrels per day expansion in oil production to 13mn b/d. This had been due by 2027.
The Brent price has fluctuated, sometimes wildly, over the past two decades. Yet the crude price, now at $82, shows every sign of remaining below triple figures.
Large, mature economies have not increased their oil consumption much in the past decade. China’s crude consumption has more than doubled over the past 20 years. But US gasoline demand has gone up by just 8 per cent, according to US Department of Energy data.
That sluggishness is more striking when you consider that the Brent price, adjusted for inflation, has not budged since 2005. Using US prices as a proxy, the cost of oil has not exceeded that of most other goods and services. In real terms it is 42 per cent cheaper than it was a decade ago.
Oil prices at $100 in 2007 and 2011 made sense in light of the explosive growth of China’s economy. The world’s capacity to supply China with oil, metals and agricultural goods could not match its needs.
Now, however, China’s economy has changed. In its rapidly evolving auto market, for example, half of all cars will be electric by 2025, thinks Bernstein.
China’s most important oil supplier, Opec, is more upbeat. The country makes up a quarter of Opec’s forecast demand increase for the next couple of years.
Three international energy agencies provide benchmark forecasts for demand and supply changes for the oil market: the International Energy Agency, America’s Energy Information Administration and Opec. Of the three, Opec has been the most optimistic, points out Jorge León at Rystad. Opec expects over 2mn b/d additional demand growth this year. That is nearly twice the IEA’s estimate, and makes the Saudi Aramco decision look odd.
For this forecast to be correct, Chinese oil demand had better get going. Despite Opec’s hopeful stance, there is plenty of spare production capacity. In Russia and Saudi Arabia alone about 4mn b/d exists. That is not far from decade highs, on Citi’s data. That potential world supply will act as a cap on prices for at least the coming year.