Oil has been and currently is an important staple in today’s energy economy, but its price history has a track record of unpredictable volatility. Lately, growing oil supplies and the resulting depressed oil price have benefited the United States and its fellow industrialized nations. While many are enjoying the low cost of energy, concern over the future of oil price and its impacts on the economy still remain.
“By itself, oil accounts for less than ten percent of world GDP, but much of the world’s capital stock is designed to use oil; when oil becomes more expensive, that capital becomes less productive,” explains the Energy Xchange.
The oil industry itself has realized a significant change in capital expenditure over recent decades, resulting in a change in global energy fundamentals. For example, during 2000-2013, the capital required to maintain oil supplies nearly tripled from $250 billion to almost $700 billion U.S. dollars in real terms. Over this same period, global crude supplies only grew by 11 percent, bolstered by growth in United States tight oil and the Canadian oil sands. These unconventional resources have become increasingly significant as conventional crude production peaked in 2005, and contribute approximately two million barrels per day less than they did at their height.
Regardless of the source, be it conventional or unconventional, many forecast an increasing demand for oil. The International Energy Agency (IEA) predicts global demand for oil to increase by 1.2 million barrels per day this year, and for that demand growth to continue through 2017. Even with these increasing demand projections, recent demand numbers are a mixed bag. United States demand growth estimates fell by 415,000 bbl/day in July year-over-year while India’s demand increased by a similar number in August. Meanwhile, supplies continue to increase. The global oil supply increased by 600,000 bbl/day year-over-year in September, placing further downward pressure on the commodity price.
In July, the World Bank predicted the average spot price of crude to drop to $43/bbl for 2016 in comparison to $51/bbl in 2015. While this is a prediction of lower oil prices, it is an increase in the World Bank’s previous estimate of $41/bbl for 2016 in response to Canadian and Nigerian supply disruptions in the second quarter. The IMF is mostly in line with the World Bank as they predict $43.60/bbl for 2016. On the other hand, Goldman Sachs has not only taken a different stance on price, but included the possibility of major price fluctuations. Their forecast from September 2015, notes a price of $49.50/bbl in 2016 but with the possibility of a short term price drop to $20/bbl. While this price drop prediction has yet to prove true this year, the possibility still remains as the unpredictability of the oil market can be heavily influenced by political events.
“Oil is important. Shockingly, sometimes horrifically important,” says Ryan Carlyle, B.Ch.E., Subsea Hydraulics Engineer. “The world economy has been developing with oil as its lifeblood for over a hundred years.” The likelihood is high for oil to continue in this role in the global energy economy for many years, and as such, analysts will be keenly focused on economic projections in efforts to navigate the uncertainty of the energy markets.
To learn more about industry outlooks, our current industrial plant inventory, and much more, visit us at IPPE.com.