The recently released World Oil Outlook 2014 discusses Opec’s forecasts for the oil market all the way up to 2040.

The study, which runs close to 400 pages, couldn’t have come at a worse time for it and the oil markets. The price of Opec’s basket of crude oils has fallen from close to $120 (Dh440) a barrel in April to just below $74 on November 17, and there is the potential for further decline.

Yet, the Opec Secretariat is upbeat about the long run by ignoring the current market conditions on the hope that these should not impair the vision well down the line to 2040.

The price of oil is assumed to remain close to $100 a barrel in 2013-dollar terms throughout the period. The assumption is driven by the marginal cost of producing a barrel in the high cost regions of deep seas, oil sands and even for tight oil in the US. The relative stability of oil prices in the last few years — of between $110 and $100 a barrel — does mean something for investors.

While marginal costs may be less than that, oil companies also want their profits to enable them to invest more. Here one has to remember that capital and operating costs have more than doubled since 2004 and further increases cannot be ruled out.

Other assumptions relate to the economic growth of 3.5 per cent a year on average, a world population growth from 7.1 to 9 billion of whom 60 per cent would be city dwellers. As for energy policies, the study takes into account those already in place including the Chinese National Plan on Air Pollution and local car sales control; Japan’s reconsideration of the nuclear option; and efficiency targets on land and shipping.

Based on these assumptions, the study recognises two periods where, in the first, oil demand would grow annually by one million barrels a day (mbd) up to 2019 to reach 96mbd. At the same time non-Opec liquids’ supply increases by 6.4mbd due essentially to US shale and Canada oil sands increases.

Therefore, the prospect for Opec crude oil production is rather negative as the required production from it is expected to fall from about 30mbd in 2013 to 28.7mbd in 2019.

Regulations

In the second period, things would be more optimistic as oil demand is forecast to reach 111mbd by 2040. This would be the result of oil use in the petrochemical sector in China and India while “the rate of penetration of new technologies has led to downward pressures on oil demand”. Also “oil demand for marine bunkers sees a downward adjustment reflecting the IMO’s regulations on efficiency and emissions, and the possible longer term impacts of moves to LNG use in the sector”.

Gasoline and diesel will continue to dominate the transportation sector with their share of car fuels only falling from 97 to 92 per cent in 2013 and 2040 respectively. Oil demand in the OECD is expected to fall while developing Asia is to account for 71 per cent of the growth.

Non-Opec supplies would still increase but at a slower rate and therefore Opec is forecast to produce 39.7mbd of crude oil by 2040.

But there are many uncertainties with respect to world economic growth and non-Opec supplies.

On economic growth, the study assumes “asymmetric uncertainty, with downside risks greater than upside potential”. Therefore if economic growth falls from 3.5 to 3.1 per cent a year or a higher economic growth of 3.9 per cent a year transpires, then “in the low economic growth scenario, oil demand by 2040 is 6.9mbd lower. In the high growth scenario, demand is 4.7mbd higher”.

Accordingly “the amount of crude required from Opec ranges from 33—44mbd by 2040.”

Downside

On the supply side, there is further potential for tight crude oil and oil sands if development picks up further in the US, Canada and Russia to the tune of further 3mbd by 2040. Additional 2mbd could come from increases in Brazil, Russia and biofuels.

But the downside relates to tight oil where “known constraints and challenges such as steep decline rates, the initial development of ‘sweet spots’, concerns over environmental impacts, and the possibility of rising costs” have been well identified. Also, “biofuels targets have been overly optimistic, (while) oil sands projections have repeatedly been brought down”.

This downside supply scenario forecasts non-Opec liquids supply at close to 5mbd lower by 2040.

The “upstream investment requirements for additional capacity amount to $7.3 trillion, in 2013 dollars. Most of this investment will be made in non-Opec countries” where high cost and higher decline rates prevail. And “Opec would need to invest an average of close to $40 billion annually in the remaining years of this decade, and over $60 billion annually in the longer term”.

These uncertainties have great implications for Opec and other oil producers and prudence will be advisable.