The game of chance is the game of losers; it has no memory, and cannot be predicted, whereas the petroleum industry has a strong memory and is bound by economic laws. However, analysts tend to forecast the industry’s future biasedly and stubbornly, in both directions.
In my opinion, those who could best foresee the petroleum industry are those who are neither optimistic nor pessimistic due to the myriad factors at play. It suffices to mention that shale oil companies erred in predicting future prices in the near-term, as—according to IHS estimates—a third of US production of 11 million barrels per day is a hedge on the price tag of $55 per barrel for a year, which resulted in $7.5 billion losses for the first half of 2021, and could shed a further $12 billion if prices continue to average $75 per barrel for the rest of the year. In broad terms, such a miscalculated hedge is one of the factors that could delay shale from bouncing back.
Generally speaking, optimism prevails in the near term. Goldman Sachs expects prices to reach $80 per barrel, especially in light of the decrease in crude inventories to below 8 percent (give or take) compared to the volume of consumption in developed countries. This indicates an improvement in supply and demand after peaking at 10.4 percent at the beginning of the crisis in April last year.
However, there is an economic ceiling to take into account as high oil prices could harm the return of global growth. According to JPM’s estimates, oil prices above $85 would negatively reflect on economic growth in the United States and on household consumption.
Moreover, there are risks that should be kept in sight, such as the emergence of the delta variant that can slow down global growth, and structural changes in global oil consumption. For example, air transport and airfreight (consuming 4.5 million barrels pre-pandemic) can take a longer time to bounce back compared to all estimates due to the development in visual communications.
In the long term, pessimists are staking on the development of the electric car. Bloomberg NEF expects the electric car industry to grow by 16 percent by 2025, then jump to 68 percent by 2040. These estimates, however, do not necessarily mean the end of the petroleum era or that developments in the electric car industry will be unaccompanied by risks. Let us remind that 52 percent of lithium reserves are concentrated in one country; Chile.
Also, and most importantly, the demand for electric power in the future is fraught with change. At present, with the acceleration of the digital world, electricity consumption associated with storing information for US companies is equivalent to New Zealand’s entire power consumption.
Furthermore, Bitcoin mining and many other digital developments underpin oil’s importance as a flexible energy source that can bridge any shortage compared to other sources of energy. But the global trend is headed for creating an energy crisis due to the 70-percent decrease in capital investments in the petroleum industry.
Worst still, long-term investments have been in decline for years, pointing toward an indulgence in the risk of future supply and demand interconnection. A report by McKinsey says that the biggest international petroleum companies, the Seven Sisters, could sell up to $140 billion in assets due to pressure from environmentalist shareholders.
Whoever looks thoroughly into the future must realize that they may not observe neither pessimism nor optimism, whether in the short- or the long-term. Oil prices will always maintain the element of surprise and stay difficult to predict—but not on par with games of chance. Oil prices cannot be capped in both directions; prices slipped into the red about a year ago, but today oil is the highest-grossing commodity of the year.
This article was originally published in, and translated from, Saudi newspaper al-Riyadh.