Industry Braces for an Uncertain Year

Abstract

Oil and gas companies are still adjusting to the sharp price volatility, collapse in credit markets, and global economic downturn of the past few months. But many analysts and forecasters believe that the medium- to long-term outlook for the oil industry has not changed, and that the need for more production, more people, and more research and development (R&D) remains. Given the sharp swings in oil prices the past several months and the unknown depth of the economic recession, the outlook for the oil industry this year is anything but certain. The oil market is still digesting Organization of the Petroleum Exporting Countries’ (OPEC's) 4 million BOPD in production cuts since last September, the organization's steepest cuts in years. Even if OPEC member countries’ compliance with the cuts fall short, a considerable amount of supply will have been taken out of the market. Whether it is enough to make up for the erosion in global demand in the short term is unclear. The price volatility of the past year has been unprecedented, with oil prices rising to USD 147/bbl before collapsing to under USD 40/bbl. Many OPEC members, including Saudi Arabia, have a target price this year of USD 75/bbl. Standard & Poor's and Moody's, largely watched investment ratings agencies, are currently using WTI price assumptions of USD 55/bbl and USD 50/bbl for this year, respectively. Oil forecasters, including the International Energy Agency (IEA), the US Department of Energy's Energy Information Administration, and others predict sharp declines in oil demand this year. The consultancy Cambridge Energy Research Associates (CERA) forecasts a 660,000 BOPD decline in demand in 2009, following a 300,000 BOPD drop in 2008, the largest demand fall since the recession of the early 1980s. The Long-Term View But in its latest World Energy Outlook, the IEA believes the current economic storm has not changed the market's long-term outlook. It sees world energy use growing more slowly to 2030 than it projected last year, but still expanding by 45% between 2006 and 2030, with an average growth rate of 1.6% per year (Figs. 1 and 2). Fossil fuels will account for 80% of the globe's energy mix in 2030 with oil the dominant fuel. China and India will account for more than half of incremental energy demand to 2030, the IEA predicts, with the Middle East also becoming a key consumption center.