The Global Energy Outlook

Pity the global oil cartel. In a rapidly diversifying, politically complex, economically dynamic and increasingly carbon-unfriendly market, it’s growing hard, if not impossible, to fix the price of energy.

From a year ago, the price per barrel has doubled, rising from $27 to $54. To boost it further, the 57-year-old Organization of Petroleum Exporting Countries (OPEC) assembled its 13 members who collectively hold nearly three quarters of the world’s proven oil reserves.

After lengthy discussions, OPEC agreed to cut production by 1.3 million barrels per day. By holding back supply against global demand, prices should rise. But will the organization succeed?

The answer is complicated by shifting new dimensions. One is logistical. To forge global consensus, the first since 2002, OPEC had to reach out for this agreement to non-member countries, like Russia. Each must weigh its own capacity, production levels and break-even point against that of others. For the majors, that price per barrel is $54, for Russia it is $46, and for Asia $42.

A second countervailing force is competition. Innovation in the fracking revolution, which unlocked shale oil across North America, responds rapidly to price signals. If OPEC succeeds in driving up global oil prices, more investment will pour into production, increasing supply.

“Don’t underestimate shale, which may put downward pressure on the prices,” says Fatih Birol, Executive Director of the International Energy Agency. He adds that, today, “oil markets are very different than before. We are going to see major volatility”, and “we may not see a rebound in investment for the third year in a row”.

A third related wrinkle is technological. Over the past decade, the price of solar – and to a lesser degree hydropower, wind, nuclear and geothermal sources – has come down by a factor of 10. Renewable energy is increasingly competitive economically with fossil fuel. So as oil prices rise, demand may soften – especially in developing world economies – and choose alternatives to oil, further deflating prices. This trend will accelerate, as energy producers continue to diversify their portfolio beyond oil and gas revenues. As a mark of that transition, Saudi Arabia is investing in solar plants.

Moving from push to pull, consumer choice introduces a fourth variable. And their preference, prices being competitive, is for a cleaner and more local “energy cocktail”, says Isabelle Kocher, Chief Executive Officer of ENGIE Group. Nations, industries, companies and even families are gravitating towards much more decentralized systems. “On the side of consumption, there is convergence for electrification. This is positive for decarbonization of the global economy,” she says.

A final wild card in energy remains geopolitics. Some nations are cutting oil subsidies; others are doing just the opposite. On the eve of his inauguration, it is unclear whether President-elect Trump will forge tighter bonds with Russia and lift sanctions, reimpose restrictions on Iran, tear up the Paris climate accord, or erect trade barriers taxing oil imports to boost jobs, revenues and demand as protectionist measures within the United States.

“It remains too risky to predict anything like the price of oil,” says Khalid Al-Falih, Minister of Energy, Industry and Mineral Resources, Saudi Arabia. “There are just too many variables, global macro risks, currency flux, or regulatory constraints.”

Al-Falih refuses to come up with an optimal desired oil price, much less a valuation after Saudi Aramco offers shares in an initial public offering. “OPEC is apolitical,” he says. “It’s a grouping of countries with a common interest, and reducing volatility and uncertainty from consumers, airlines. Petroleum companies lose sleep and may lose their well-being because of this unpredictability.”