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World Oil Prices in AEO2006 |
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World oil prices in the AEO2006 reference case are substantially higher than those in the AEO2005 reference case. In the AEO2006 reference case, world crude oil prices, in terms of the average price of imported low-sulfur, light crude oil to U.S. refiners, decline from current levels to about $47 per barrel (2004 dollars) in 2014, then rise to $54 per barrel in 2025 and $57 per barrel in 2030. The price in 2025 is approximately $21 per barrel higher than the corresponding price projection in the AEO2005 reference case (Figure 10). The oil price path in the AEO2006 reference case reflects a reassessment of the willingness of oil-rich countries to expand production capacity as aggressively as envisioned last year. It does not represent a change in the assessment of the ultimate size of the world’s petroleum resources but rather a lower level of investment in oil development in key resource-rich regions than was projected in AEO2005. Several factors contribute to the expectation of lower investment and oil production in key oil-rich producing regions, including continued strong worldwide economic growth despite high oil prices, and various restrictions on access and contracting that affect oil exploration and production companies. Although oil prices have stayed above $40 for the past 2 years, world economies have continued to grow strongly: in 2004, global GDP registered the largest percentage increase in 25 years. As a result, major oil-exporting countries are likely to be less concerned that oil prices will cause an economic downturn that could significantly reduce demand for their oil. When economies continue to grow despite higher oil prices, key suppliers have much less incentive to expand production aggressively, because doing so could result in substantially lower prices. Given the perceived low responsiveness of oil demand to price changes, such an action could lower the revenues of oil exporters both in the short term and over the long run. International oil companies, which normally are expected to increase production in an environment of high oil prices, lack access to resources in some key oil-rich countries. There has been increased recognition that the situation is not likely to change over the projection period. Furthermore, even in areas where foreign investment by international oil companies is permitted, the legal environment is often unreliable and complex and lacks clear and consistent rules of operation. For example, Venezuela is now attempting to change existing contracts in ways that may make oil company investments less attractive. In 2005, Russia announced a ban on majority foreign participation in many new natural resource projects and imposed high taxes on foreign oil companies. These changes, and others like them, make investment in oil exploration and development less attractive for foreign oil companies. The structure of many production-sharing agreements also increases the risk faced by major oil companies in volatile oil price environments. Many contracts guarantee a return to the host government at a fixed price, plus some percentage if the actual world oil price increases. The foreign company bears the full risk if the actual oil price falls below the guaranteed price but does not reap significant rewards if the actual price is higher than the guaranteed price. This asymmetrical risk sharing discourages investment when oil prices are likely to remain volatile. It may also hurt the oil-rich countries, if limited foreign investment prevents them from realizing the benefits of the major technological advances that have been made in the oil sector over the past two decades. Because OPEC has less incentive to invest in expansions of oil production capacity than was assumed in AEO2005, and because contracting provisions affecting international exploration and production companies have shifted more risk to those companies, the AEO2006 reference case projects slower output growth from key oil-rich countries after 2014 than was projected in the AEO2005 reference case. Energy market projections are subject to considerable uncertainty, and oil price projections are particularly uncertain. Small shifts in either oil supply or demand, both of which are relatively insensitive to price changes in the short to mid-term, can necessitate large movements in oil prices to restore the balance between supply and demand. To address uncertainty about the oil price projections in the AEO2006 reference case, two alternative cases posit world oil prices that are consistently higher or lower than those in the reference case. These high and low price cases should not be construed as representing the potential range of future oil prices but only as plausible cases given changes in certain key assumptions. The high and low price cases in AEO2006 are based on different assumptions about world oil supply. The AEO2006 reference uses the mean oil and gas resource estimate published by the U.S. Geological Survey (USGS) [16]. The high price case assumes that the worldwide crude oil resource is 15 percent smaller and is more costly to produce than assumed in the reference case. The low price case assumes that the worldwide resource is 15 percent more plentiful and is cheaper to produce than assumed in the reference case. Thus, the major price differences across the three cases reflect uncertainty with regard to both the supply of resources (primarily undiscovered and inferred) and the cost of producing them. Figure 11 shows the three price projections. As compared with the reference case, the world oil price in 2030 is 68 percent higher in the high price case and 41 percent lower in the low price case. As a result, world oil consumption in 2030 is 13 percent lower in the high price case and 8 percent higher in the low price case than in the reference case. The high and low price cases illustrate that estimates of world oil resources that are lower and higher than the estimate used in the reference case can play a significant role in determining future oil prices. The projections for world petroleum consumption in 2030 are 102, 118, and 128 million barrels per day in the high, reference, and low price cases, and the projected market share of world petroleum liquids production from OPEC in 2030 is about 31 percent in the high price case and 40 percent in the reference case and low price cases. Because assumed production costs rise from the low price case to the reference case to the high price case, the differences in net profits among the three cases are smaller than they might have been if the underlying supply curves for OPEC and non-OPEC producers had remained unchanged. Although OPEC produces less output in the high price case than in the reference case, its economic profits are also less, because resources are assumed to be tighter and exploration and production costs higher for conventional oil worldwide. In the absence of tighter resources and higher costs, an OPEC strategy that attempted to pursue the output path in the high price case would subject OPEC to the risk of losing market share to other producers, as well as to alternatives to oil. Further discussions of the three price cases and their implications for energy markets appear in other sections of AEO2006.
[16] The USGS provides three point estimates of undiscovered and inferred resources: the mean, a 5-percent confidence interval, and a 95-percent confidence interval with no price relationship. AEO2006 assumes that proven reserves.
Contact: Nassir Khilji |
