Jilles van den Beukel and Lucia van Geuns
HCSS, September 2018
Over the last few years the oil price has experienced significant changes. From well over 100 dollars per barrel in the pre-2014 high oil price world, the price dropped to as low as 30 dollars per barrel in early 2016. Since then, it has embarked on a trajectory of gradually rising prices, reaching close to 70 (WTI) or 80 (Brent) dollars per barrel in the second quarter of 2018.
The main cause for the big oil price drop in 2014 was the United States (US) oil industry cracking the code to start unlocking vast amounts of shale (or tight) oil by fracking. Nevertheless, the rise of US shale does not seem more important than other major technological breakthroughs from the last decades, such as 3D seismic, horizontal drilling and the opening up of deepwater.
The Paris climate agreement, on the other hand, has fundamentally changed the world of oil. Oil is no longer a relatively scarce commodity that will be needed for an, for all practical purposes, infinite amount of time. Whilst climate change has been well understood for decades, the Paris Agreement marks a major step in the willingness of society to act. Even at a time when all measures related to limiting global warming are only having a minimal influence on oil demand (Electric vehicles [EVs] reduced oil demand by about 0,05% in 2017, for example) they have started to influence investment decisions and valuations of oil companies.
In one of Shell’s scenarios in the early 1970s, Pierre Wack, discussing the potential effects of nationalizations and the increasing power of Organisation of the Petroleum Exporting Countries (OPEC), compared the oil industry to a boat floating down a river: everyone could see the bend ahead and hear the waterfall beyond it, aware of what was to come. The same dynamic is at play today.
We aim to discuss the questions and uncertainties that, in our view, matter the most for the future of oil markets and the oil industry. Whilst discussing different scenarios we will not refrain from focusing on the scenario that we consider the most likely (rather than giving an extensive overview of potential scenarios). We will do so for three different timeframes:
- Short term, up to 2020, with a focus on shale oil
- Medium term, 2020-2025, with a focus on conventional oil
- Long term, 2025-2040, with a focus on peak oil (demand)