The Economy

Oil Prices to Pick Up Slowly To 2020, IEA Says

While it won't be a smooth market adjustment, the price of oil should hit $80 per barrel in less than five years, says the IEA.
Katie Kuehner-HebertNovember 10, 2015
Oil Prices to Pick Up Slowly To 2020, IEA Says

While it may take decades for oil prices to recover, the International Energy Agency on Tuesday cautioned that producers should not significantly cut back on long-term investments.

Demand for oil could pick up slowly to 2020, adding an average of 900, 000 barrels a day per year, gradually rising to a demand of 103.5 million barrels per day by 2040, the IEA said in its forecast. That compares with demand of 94.5 million barrels per day this year.

Spending for exploration and production has fallen more than 20% in 2015, but the IEA cautioned against more cutbacks.

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“An annual $630 billion in worldwide upstream oil and gas investment — the total amount the industry spent on average each year for the past five years — is required just to compensate for declining production at existing fields and to keep future output flat at today’s levels,” the IEA wrote. “The current overhang in supply should give no cause for complacency about oil market security.”

The rise in prices after 2020 would be “moderated by … efforts to phase out subsidies (provided that momentum behind reform is maintained, even as oil prices pick up), efficiency policies, and switching to alternative fuels,” the agency wrote.

If oil prices were to stay in a rut for longer, a scenario which the IEA said could not be ruled out, the price of oil would remain close to $50 per barrel until the end of 2020 before rising gradually back to $85 per barrel in 2040.

IEA executive director Fatih Birol told CNBC that it would be unlikely that the price of oil would be again stuck at $50 for “many many years.”

Birol added that Iraq production growth would slow down due to geopolitical turmoil, while growth in Brazil, Canada, and Russia would also not be as strong as before.

On the demand side, the IEA forecast that collectively, the United States, European Union, and Japan would see their oil demand drop by about 10 million barrels a day by 2040.

“Renewables-based generation reaches 50% in the EU by 2040, around 30% in China and Japan, and above 25% in the United States and India,” the IEA said in its report.

“In advance of the critical COP21 climate summit in Paris, there are clear signs that an energy transition is underway: renewables contributed almost half of the world’s new power generation capacity in 2014 and have already become the second-largest source of electricity (after coal),” the IEA added.