Choosing Opec’s next move is a complex mix of game theory and signalling, beyond simply barrel-counting. But even the number-crunching of supply and demand is proving hard. What does Opec’s latest long-term outlook suggest it, and its biggest member, Saudi Arabia, should do now?
The Financial Times reported on Thursday, based on anonymous sources, that Riyadh was prepared to abandon its “unofficial price target of $100 a barrel” and that it would increase production from December onwards, as previously committed.
And on Tuesday, Opec released its latest annual long-term outlook, extending to 2050. Of course, there is always room for short-term tinkering, but the current market management approach of Opec+ has already endured eight years. Three more such periods take us to midcentury. What Opec+ and Saudi Arabia decide to do now has to be in service of the long-term objective.
The last two decades alone have seen repeated shocks and energy market transformations: the US occupation of Iraq, China’s frenetic rise, the global financial crisis, the US shale oil and gas revolution, the rise of truly cost-effective electric cars, batteries and solar and wind power, the Covid-19 pandemic, Russia’s invasion of Ukraine and now Israel’s wars in Gaza and Lebanon.
Several of these factors hit oil demand or boosted competing supply. One, China’s rise, supercharged oil consumption, but now seems to be running out of steam. Opec had, of course, to contend with dramatic short-term shocks, particularly avoiding the complete collapse of the oil market that appeared possible in the early months of 2020.
The oil exporters’ organisation forecasts much stronger demand in the short term than rival agencies. On top of nearly 103 million barrels per day last year, it sees 2 million bpd of growth this year and 1.7 million bpd next year, compared to 0.9 million and 0.95 million bpd from the International Energy Agency (IEA), and 0.9 and 1.5 million bpd from the US Energy Information Administration (EIA). The gap is particularly remarkable with only the final quarter of this year remaining.
Despite this divergence, Opec’s analysis has grown more, not less, confident about the future of oil demand. Its annual outlooks from 2019 to 2022 saw global demand flattening from 2035, landing in a range of about 108-111 million bpd by 2040 to 2045. Partly, this reflected pessimism about demand recovery from the pandemic.
Now, the 2023 and 2024 outlooks together have boosted this by 8 million bpd or so, with the latest report seeing growth at quite a healthy rate post-2045 (the previous reports did not extend to 2050). In particular, the 2023 and 2024 editions are much more bullish than the previous four on growth up to 2030.
Opec’s more optimistic viewpoint is because of the rapid rebound from the pandemic, greater concern for energy security than climate action, and the need for more affordable energy to power developing nations. In particular, it is bullish on India, where it predicts another 8 million bpd of oil demand by 2050 over last year’s 5.4 million bpd. And despite governments’ environmental aspirations, Opec is understandably sceptical about whether even current plans will be fully delivered, let alone more ambitious future policies.
This view contrasts sharply with several other leading agencies and analysts. The IEA’s “Stated Policies” case sees demand by 2045 at 97.5 million bpd, while BP’s “Current Trajectory” projection has 84.1 million bpd. The IEA and BP present other scenarios where oil demand diminishes much quicker because of climate action. Even US supermajor ExxonMobil, by contrast, solidly wedded to its legacy business, sees barely any growth in oil demand after 2025, though no decline either.
Contrary to the Financial Times report, Opec and Saudi Arabia do not have an explicit (even if private) price target, but they certainly are acutely tuned to prices falling lower than they wish. It is revenue – price times sales – that matters, though. In the short term, production cuts can maximise revenue. In the longer term, they become increasingly dangerous, because they discourage demand, while encouraging competing production.
That is exactly what has played out since 2016, and especially from 2022 onwards. Relatively high oil prices helped stoke inflation, leading to interest rate rises and a slower global economy. US shale production proved – yet again – surprisingly resilient. Higher prices accelerated the development of some new frontiers such as Guyana, while helping mature producers such as China to eke out additional barrels.
These risks become even greater in 2050. In particular, expensive oil will push motorists more quickly to electric vehicles.
The payoff to raising production more aggressively and accepting lower prices depends on what we assume for the price-responsiveness of demand and of competing supply, and how fast existing production would decline in the absence of new investment. Trying to gain market share is much riskier in the world of the BP or IEA scenarios, than in that of the Opec outlook where demand rises strongly and the big problem is underinvestment and too little oil.
Nevertheless, under some reasonable assumptions, Opec+ as a whole would gain revenue by restricting output. But Saudi Arabia and the other core Opec producers, such as the UAE and Iraq, would benefit from boosting their production substantially by 2050, versus holding it at today’s levels, even in the more pessimistic outlooks for demand. Indeed, raising production would make these downside cases less likely to materialise.
This does suggest that a change of approach by Riyadh could bear fruit: activate measured production increases from December onwards as planned, until, after a couple of years, some of the weaker members would no longer be able to keep up. The pain of lower prices would be immediate, the uncertainties immense, but the long-term result far preferable.
Robin M. Mills is chief executive of Qamar Energy and author of 'The Myth of the Oil Crisis'
