4 factors that will affect long-term oil prices

The recent fall in oil prices to less than $50 per barrel and the rebound to $60 per barrel took many by surprise, following three and a half years of relative stability at around twice that level. Yet a longer-term view of history shows that prices have always fluctuated, for reasons including demand, supply, geopolitical tensions and OPEC intervention. At the end of the 1990s, for example, the price dropped below $20 per barrel.

Does that mean that what comes down must go up, and it is only a matter of time before the recent dramatic fall is significantly reversed? Not necessarily. The long-term outlook for the future of oil prices is complicated by four factors that have not featured in past market shifts.

1. There are more options than in the past. Not only are there economically viable alternatives to fossil fuels, but fossil fuel can now come from alternative sources and countries, in the shape of shale and deep water.

2. We are heading towards the electrification of society. The trends underlying this are the abundance of natural gas, the development of new technologies and the digitization of the grid. Cheaper oil may slow the uptake of electric vehicles in the short term. But advances in the medium term will add to pressure for efficiency in internal combustion engines – currently, an estimated 1 million barrels of oil are wasted in the US due to traffic congestion – which will further reduce demand for oil.

3. Pressure to take action on climate change is stronger than ever. The business world is actively responding, with more and more companies across the energy spectrum – oil and gas, utilities, energy technology and renewables – putting forward proposals. Several are even advocating a clear carbon pricing policy, with a defined trajectory of costs, as a possible solution. The UN Climate Change Conference, COP21, in Paris at the end of this year may be a significant milestone.

4. Technological innovation is a big unknown. In the energy sector, as in every walk of life, there is much uncertainty about the impact of fast-developing innovations in areas such as big data, nanotechnology and artificial intelligence. Some implications can be imagined, such as improvements in efficiency from better traffic management, optimizing the grid and reducing mistakes from human error, but there will likely also be implications nobody has yet thought of.

None of this means the lower oil price is a structural change for the long term. However, it is at least plausible that we are seeing the development of a “new normal”, with the power of OPEC changed by the rise of oil and gas in North America and other geographies, and the growing viability of a broad range of alternatives. From this view, the recent fall in oil price could signify that just as it looks like geopolitics is becoming more multipolar, perhaps the energy world in transitioning to multipolarity, too.

Author: Roberto Bocca is the Head of Energy Industries at the World Economic Forum

Image: A gasoline pump is seen hanging at a petrol station in central Seoul April 6, 2011. REUTERS/Lee Jae-Won