OPEC says a $10 trillion investment is needed to prevent a massive spike in oil prices

OPEC says that $10 trillion worth of investment
will need to flow into oil and gas through 2040 in
order to meet the world’s energy needs.
The OPEC published its World Oil Outlook 2015
(WOO) in late December, which struck a much
more pessimistic note on the state of oil markets
than in the past. On the one hand, OPEC does not
see oil prices returning to triple-digit territory
within the next 25 years, a strikingly bearish
conclusion. The group expects oil prices to rise
by an average of about $5 per year over the
course of this decade, only reaching $80 per
barrel in 2020. From there, it sees oil prices rising
slowly, hitting $95 per barrel in 2040.
Long-term projections are notoriously inaccurate,
and oil prices are impossible to predict only a few
years out, let alone a few decades from now.
Priced modeling involves an array of variables,
and slight alterations in certain assumptions –
such as global GDP or the pace of population
growth – can lead to dramatically different
conclusions. So the estimates should be taken
only as a reference case rather than a serious
attempt at predicting crude prices in 25 years.
Nevertheless, the conclusion suggests that OPEC
believes there will be adequate supply for quite a
long time, enough to prevent a return the price
spikes seen in recent years.
Part of that has to do with what OPEC sees as a
gradual shift towards efficiency and alternatives
to oil. The report issued estimates for demand
growth five years at a time, with demand
decelerating gradually. For example, the world will
consume an extra 6.1 million barrels of oil per
day between now and 2020. But demand growth
slows thereafter: 3.5 mb/d between 2020 and
2025, 3.3 mb/d for 2025 to 2030; 3 mb/d for
2030 to 2035; and finally, 2.5 mb/d for 2035 to
2040. The reasons for this are multiple: slowing
economic growth, declining population rates, and
crucially, efficiency and climate change efforts to
slow consumption. In fact, since last year’s 2014
WOO, OPEC lowered its 2040 oil demand
projection by 1.3 mb/d because it sees much
more serious climate mitigation policies coming
down the pike than it did last year.
Of course, some might argue that even that
estimate – that the world will be consuming 110
mb/d in 2040 – could be overly optimistic.
Coming from a collection of oil-exporting
countries, that should be expected. Energy
transitions are hard to predict ahead of time, but
when they come, they tend to produce rapid
changes. Any shot at achieving the world’s stated
climate change targets will require a much more
ambitious effort. While governments have dithered
for years, efforts appear to be getting more
serious. More to the point, the cost of electric
vehicles will only decline in real dollar terms over
time, and adoption should continue to rise in a
non-linear fashion. That presents a significant
threat to long-term oil sales.
At the same time, OPEC also issued a word of
caution in its report. While oil markets experience
oversupply in the short- to medium-term, massive
investments in exploration and production are still
needed to meet demand over the long-term. OPEC
believes $10 trillion will be necessary over the
next 25 years to ensure adequate oil supplies. “If
the right signals are not forthcoming, there is the
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 for
prices,” OPEC concluded. About $250 billion each
year will have to come from non-OPEC countries.