At the 2023 United Nations Climate Change Conference (COP28) in Dubai, 50 of the world’s top fossil fuel companies promised to eliminate emissions from their own operations by the middle of the century as part of a package of pledges. ExxonMobil, Total, BP and Shell were among the companies to agree to set or tighten voluntary deadlines for emission reductions, along with state energy companies Saudi Aramco and the Abu Dhabi National Oil Company. None agreed to reduce hydrocarbon production. The companies, which represent about a third of global oil and gas production, also pledged to stop routine flaring of excess gas and to eliminate leaks of methane by 2030.
The main state energy companies of Iran, China, Mexico, Kuwait, Venezuela and Russia did not participate. The pledge covering oil and gas industry operations addresses only about 15% of the total greenhouse gases the energy sector is responsible for contributing to global warming. The pledge steered clear of addressing the carbon dioxide released when fuels are burnt, which makes up the bulk of the industry’s greenhouse gas emissions. For all the hot air, while the pledges might make for good TV soundbites, they are unlikely to make much difference.
What about long-term oil prices?
Prices are volatile, as one would expect, for the world’s most traded commodity, which is heavily influenced by geopolitics. In recent weeks, the Organization of the Petroleum Exporting Countries plus (OPEC+) members agreed to make additional voluntary cuts to oil production in 2024 in a feeble attempt to boost prices. Still, they fell short due to signs of strains in the group. Saudi Arabia pledged to extend a voluntary cut of 1 million barrels per day (mbd), while Russia said it would reduce exports by 500,000 b/d. Producers are simply trying to manipulate prices to offset a slow global economy and rising supplies from the US.
Source: US Energy Information Administration
It is probably better for investors to focus on the medium to long term, rather than guess the direction of oil prices in the short term. And so, it’s best to examine the fundamentals of demand and supply over a period of years, not weeks or months. While a deep dive is beyond the scope of this QB, we can make some observations that tend to support a rising oil price over the years ahead, particularly post the next year or so, due to the emerging supply-demand gap beyond 2025.
There are an almost infinite number of factors to consider, so we’ll limit ourselves to just a few observations and, of course, much will depend on the trajectory of world growth in the years ahead.
In the US, the Strategic Petroleum Reserve (SPR) is currently around 40% below the long-term average level of 600 million barrels. Commercial crude inventories are similarly below historical averages. Going forward, US production is expected to be limited as “higher-for-longer” interest rates dampen the flow of capital into new supply, shale oil productivity peaks and operators prioritise shareholder returns over growth.
In the same vein, most of the supply sources elsewhere around the globe are being depleted as old field production levels naturally decline and new investment remains limited. While OPEC tries to ramp up production to meet rising demand, but then crimp production to support prices, in the medium term its spare capacity is being steadily depleted. Furthermore, political imperatives will demand more rather than less focus on renewables in place of fossil fuels.
Source: JP Morgan
Geopolitical unrest could further elevate oil prices, though it’s hard to imagine much more turbulence than we’ve already been experiencing – a Russian invasion of Ukraine and war in the Middle East. While oil spiked 7% following the Hamas attack on 7 October, the price soon drifted lower once it became less likely that the conflict would engulf the major oil producing countries in the region. Nevertheless, the Israel-Hamas war is a reminder that the lack of spare capacity in the oil industry is a constant threat to supply.
Demand, on the other hand, is steadily rising. JP Morgan Research forecasts that world oil demand will reach 107 mbd by 2030 — an increase of about 5.5 mbd from 2023 levels. This is underpinned by population growth and rising energy consumption in developing nations, such as in Africa, South America and India, outweighing the energy efficiency measures being undertaken in more developed economies.
Rising energy demand places greater pressure on traditional fuels to fill the gap. This is because the clean energy system (especially wind and solar) is not yet sufficiently developed to capture and distribute the significant increase in power generation due to supply chain, infrastructure, and key materials bottlenecks. Generating and distributing the power necessary to meet global energy demand growth and progressively decarbonise the global economy is a multi-decade process. There are no magic buttons we can push, and oil (and gas and coal) will be with us for many years to come, whatever the politicians might tell you. The alternative will be to live with regular blackouts.
Research estimates that global oil markets could face a 1 mbd deficit in 2025, widening to 7 mbd in 2030. Consequently, oil prices could perhaps spike to as high as $150 per barrel of crude oil (bbl) over the medium term before settling down to around $75-$100 bbl over the long term. These are simply estimates and should not be relied upon. As we have so often said, forecasting is tricky. Or as Charlie Munger said, “I think I’m pretty good at long run expectations, but I don’t think I’m good at short-term wobbles. I don’t have the faintest idea what’s going to happen short term.”
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