As far as oil prices are concerned, many scenarios are possible. A jump to $300 per barrel or more in the near future may be the result of a geopolitical crisis in Iran, Venezuela, Saudi Arabia or elsewhere. Low price scenarios seem unlikely today but cannot be completely excluded. Another one which we consider of interest is a “dual-crisis” or “double-shock”. It would present a number of similarities with the development observed between 1973 and the end of the eighties.
It has often been said that the recent rise in prices is not comparable to that of 1973, the first oil crisis having been triggered by a reduction in supply whilst the present oil price increase could be attributed to runaway demand. Note, however, that during the 1960s, worldwide consumption of petroleum products increased by 7 to 8% annually, but production capacities did not increase at the same rate. The events associated with the Israeli-Arab conflict (i.e., the Yom Kippur war) accelerated the rise in prices, but that rise would most likely have occurred anyway, although spread out over time as it has been the case since 2000.
In short, the rise in prices over the past few years, as in 1973, reveals the need for consuming countries to make decisions to promote energy savings and the development of alternative energy technologies. As in the seventies with the French nuclear program, several steps have already been taken, in favour of biofuels for instance. In spite of growing nationalism and a lack of opportunities for international oil companies, investment in exploration and production is increasing. Note, however, that the major part of this increase in investment is due to the inflation of costs, only a small part corresponds to an increase in activity.
In the absence of geopolitical events, it is possible that production capacities will be restored if all development projects are realized as planned. We might then see a stabilization or an erosion of prices for a few, or several, years. However, if demand continues to grow, these recent measures may prove to be not sufficient. Then, even if the “oil peak,” strictly speaking, only occurs around 2030, it is likely that the production of natural hydrocarbons will be unable to follow demand as early as the beginning of the next decade. Before prices return to a new long-term equilibrium which could be about $100 to $ 150 a barrel (in constant dollars), it is highly likely that an additional “crisis” will occur, similar to the 1979-80 crisis, with price levels of $200, $300 per barrel or more for several years. These high prices will probably be necessary to promote an inevitable energy transition, for investments to be made both on the supply side as well as on the demand side in order to develop renewable energy sources without major subsidies, to stimulate the production of synthetic fuels, to renew nuclear programs, etc.
Last but not least, we should bear in mind the role played by expectations and how forecasts can be self-destructive in the oil industry. One especially relevant example relates to the 1985 price drop. Political and industrial decisions resulting in energy efficiency, substitution, exploration and production of “difficult” oil in non OPEC regions occurred not simply because the price of crude was high but because it was considered unlikely that prices would not continue to rise. Consequently, the most effective factor for avoiding the coming crisis of a dual shock scenario would be a consensus about its arrival. In this context, the fact that the 5-6 year forward price of oil is at present reaching a hundred dollars is probably to some extent rather good news.
Denis Babusiaux, Pierre- René Bauquis
This post is derived from “Depletion of petroleum reserves and oil price trend” a report we wrote for the French Academy of Technology. You can dowload the report in French here and the English version here.