Crude oil prices are currently on the rise and could continue to rise in the coming years. Oil futures markets show that further price increases are expected in the next year or two. The impact of higher energy prices is expected to have an effect on the economy and shift the relationship between energy and income. But despite these developments, the global fossil fuel industry may face a structural decline, particularly in the medium to long term.
Oil production is stagnating. This means that the rate of increase is less than one percent per year, or roughly one-fourth of the growth rate observed in the 1990s. This is a result of sluggish supply responses to demand and is a sign of increasing scarcity.
There are a number of reasons for this slowdown in oil production. For instance, political instability, poor infrastructure, and lack of investment in oil projects have caused many countries to miss their quotas. Another reason is the decline in demand that has occurred over the past several months. In the face of this sluggish supply response, it is difficult for oil producing countries to restrain production.
Attempts to improve the recoveries of mature fields, coupled with the emergence of renewables, have improved the scope for enhanced recovery at a lower cost. Still, continued field declines will limit new net capacity in oil production. If such declines remain, we can expect more severe oil scarcity.
Although we don’t yet have a clear picture of the full extent of the oil market’s current crisis, a large amount of uncertainty has accumulated. The risk of a sharp adjustment in asset prices and liquidity has been heightened. As a consequence, some countries may be able to weather the crisis on their sovereign wealth funds. Others, however, may have to make some hard choices.
There are several different scenarios for the future of the global oil market. A baseline scenario assumes that prices will stabilize at around the high levels we have seen over the last few months. It also assumes that the tension between oil prices and demand has been resolved. On the other hand, an alternative scenario considers the implications of more pessimistic assumptions about world oil output.
This scenario uses a global integrated monetary and fiscal model and estimates that oil supply will decline by 3.8 percentage points annually, compared to the 1.4 percentage point decline in the baseline scenario. It also estimates that the decline in world oil production will be slightly offset by the growth in oil demand. However, this does not fully address the downside risks to the oil production growth, and we cannot be sure that the downside will be as severe as in the benchmark scenario.
Several studies have estimated the absolute global decline rate at two to three percent. Although this estimate is lower than the OECD’s figure, it is still an important measure of the level of scarcity. Even if the rate of decline is a bit lower than the OECD estimate, it is still significant, especially if we include the effects of the COVID-19 outbreak.