OPEC is confident oil prices will start to rise from next year. The organization feels the cost of exploration will drive the prices up, despite production remaining at record high levels.
From $110 a barrel last year, prices for crude oil have fallen to less than $40 due to oversupply and slowing demand. However, the Organisation of the Petroleum Exporting Countries, or OPEC for short, is confident that oil prices will gradually begin an upward climb from 2016 and continue to rise from a long-term perspective due to continually increasing cost of exploration and pumping of crude.
Despite the seemingly positive outlook, OPEC has lowered its long-term estimates for oil demand. Additionally it said an investment exceeding $10 trillion, spread over the next 25 years, will be required to cover future needs and keep the price rise in check, reported FT.
OPEC is currently engaged in a delicate balancing game with one of its most powerful member Saudi Arabia. The Saudis have been upping supply, an increase that has been matched by the United States, whose domestic production of crude has nearly doubled in the last six years. Additionally, OPEC will have to gradually face an increasing challenge from energy-efficient vehicles as well as electric cars.
Interestingly, it is these record low prices that are currently prevalent, which could lead to a surge in prices in the near future, as OPEC forecast in its World Oil Outlook. Abdalla El-Badri, secretary-general of OPEC, reasoned that if major companies continually kept their spending on crude to a low level, and if the oil prices continued to stay below $40 a barrel for prolonged periods of time, it could have a serious impact on future oil supplies:
“If the right signals are not forthcoming, there is a possibility that the market could find that there is not enough new capacity and infrastructure in place to meet future rising demand levels, and this would obviously have a knock-on impact on prices.”
Oil prices across the globe and particularly in America have been crashing. Currently, prices of Brent Crude are hovering at $37 a barrel, which is almost a third of what it was commanding about a year ago. Vast quantities of shale oil produced in the U.S., combined with the adamancy of Saudi Arabia saying it was tired of cutting output to guarantee $100 a barrel for high-cost rivals, are the primary reasons for the steady decline in oil prices.
Crude oil price is at its 11-year low and this is extremely concerning for OPEC, which is also suffering from extensive reduction of its market share. The group currently accounts for about 30 percent of the world’s oil production, down from 50 percent in the 1970s, reported BBC. Interestingly, OPEC expects its market share to shrink further within the next five years, mainly because its rivals are proving to be a lot more resilient and persistent than the group expected them to be. But this loss will be temporary.
Despite the sliding prices, oil producers across the world haven’t reduced their production, ensuring that prices kept plunging further. However, OPEC is confident this trend won’t last forever. The group is sure U.S. shale oil producers won’t be able to cope with such low prices for long. Hence American oil producers will gradually slow their production or may even be forced out of business due to unbalanced economies of scale and skewed supply and demand parameters.
Current low oil prices will also impact spending on future explorations. Once dependable supply sources start to dry up, companies will need a lot of investment for newer locations, which might be deep in the ocean, making it a very expensive proposition. This will undoubtedly force them to raise prices.
[Photo by Andrey Rudakov / Bloomberg / Getty Images]