Forecasters of the energy and oil markets tend to give a middle of the road picture for their reference or base case projections as it is generally based on currently acceptable or reasonable assumptions, some of which may remain stable over the forecast period.

But nobody can read the future with certainty and therefore forecasters resort to scenario planning to give room for possible outcomes if some of the basic assumptions change.

The Opec Secretariat is no different and in its World Oil Outlook 2016 (WOO) there is a whole section discussing challenges and opportunities facing the oil market to 2040.

The climate change issue as capped by the Paris Agreement to tackle greenhouse gas emissions and rising global temperatures is a challenge indeed. While the impact of the known commitments of the countries who signed is taken into consideration in the base case scenario, there is a possibility that some countries may overshoot and others underperform and others may access to the agreements later.

After all, the goals of the “Intended Nationally Determined Contributions” (INDCs) to greenhouse emissions reduction of countries to meet their obligations are based on “improvements in energy efficiency and a reduction of emissions through changing the energy mix and/or expansion of sinks in the land sector”. These will cause a reduction of future energy and oil demand.

The WOO tells us that within these possibilities energy demand in 2040 may be reduced by 11 to 27 million barrels of oil equivalent (mboe) a day from 382 mboe a day in the reference case, and the whole of the reduction will be from fossil fuels, especially coal and gas in power generation. Oil demand then is likely to fall by 2.5 mbd to 11 mbd in 2040 from 109 mbd in the reference case as a result of higher fuel efficiency and further penetration of electric cars and other alternative fuels vehicles.

Target

Only in the US, increasing volumes of renewable fuels are mandated year after year where “18.11 billion gallons as the minimum amount of renewable fuel to be consumed during 2016. This is a significant jump from the 16.93 billion gallons target for 2015.”

Low oil prices since mid-2014 “led to significant reductions in investments across the oil industry”, where “in 2015, the reduction in upstream capital expenditure was in the range of 25 per cent (compared to 2014); while in 2016 further reductions of more than 20 per cent are anticipated.”

This may lead to a higher oil demand but may also lead to a boom and bust cycle “that is undesirable for both producers and consumers”. The world economy which in itself is a source of uncertainty given its current problems and the moderate growth expectations.

But “the global economic situation has also upside potential in the medium-term”, where reforms in China, India and others “could stimulate growth and have positive spillover effects elsewhere”, even on oil demand. Solutions to geopolitical problems could have an equally positive effect on the economy and oil demand.

Technology

Even non-Opec supply outlook is not immune from uncertainty in both positive and negative directions. These are the result of the level of investment, evolution of costs and technology and geopolitical developments. We have an example of how technology brought fortune to shale and tight oil and gas in the US.

The WOO forecasts non-Opec supply in 2040 to reach 63.2- or 55.8-mbd in the upside and downside scenarios respectively compared to 58.9 mbd in the reference case. Such a result will affect Opec production, which could reach 36.6- or 44.1-mbd respectively as compared with 41 mbd in 2040 reference case. This is a wide range and Opec should take notice, especially with what may lead to the upside case.

With respect to renewable energy, where solar and wind are the most popular, costs could fall further, efficiency could increase, the issue of intermittent production could be resolved by advances in storage batteries. Such an outcome is likely to affect the energy mix.

Subsidies

The same goes for electric or hybrid cars though there is a need to increase electricity production for the purpose. Will this come from renewable sources or as is the case in Japan from increased nuclear energy supply?

Another trend that may impact further is the drive by many countries to remove subsidies and how others may follow. Low oil prices in the last two-and-a-half years encouraged many countries to take the plunge and remove subsidies partially or totally.

These are then some of the challenges facing the oil industry. They are enormous and not to be belittled. Oil producers should focus on them constantly.

Despite the ups and downs in the industry, it has always moved forward and was innovative enough to weather challenges.

The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.