I am of the opinion that oil prices are likely to spike around 2020 due to a lack of exploration capital spend. I am also of the opinion that we're likely to hit peak oil demand around 2040.
The research paper by Dale and Fattouh basically states that peak demand will happen at some point. The question that everyone is over-looking is that we are going to see a "shift in paradigm from an age of (perceived) scarcity to an age of abundance." This will shift how oil producers view their oil reserves. In the past (and currently), oil producers didn't just pump oil as fast as possible, because if we were in an age of scarcity oil over-time was an appreciating asset. Now that peak supply (scarcity) is no longer a worry and we're now in an age that will hit peak demand (abundance), the value of oil reserves is unlikely to increase in value.
What this comes down to is that previously, low cost producers were more than happy to hold back production and sell at prices set by the needs of high cost producers. We could now be entering a phase where low cost producers will under-cut the high cost producers.
But who is the low cost producers? Per the article, the Middle-East countries can break-even at $10/barrel. On the other hand, they have a "social cost of production." Many OPEC countries use their oil profits for government programs; this is what is called the social cost of production. Per the research paper:
For example, the IMF estimate that in 2016, the five major Middle-Eastern oil producers had an average fiscal break-even price of around $60 p/b, compared with estimates of an average (physical) cost of production of around $10.
That brought to mind other articles I've read where deep water drilling prices are starting to drop to around $50/barrel. And there is an eye on even lower break-evens. Per Offshore Magazine:
This aside, and more importantly, there is still much curiosity on how operators can sanction projects with a $40/bbl deepwater breakeven cost. Two questions yet to be answered are whether operators can deliver projects at $40/bbl; and how much of the cost opportunity identified is structural or subject to escalation as oil prices rise.
This new paradigm will lead to some complications.
Many OPEC nations require $60 in order to keep their countries running smoothly. Deep water drillers are eyeing $40 breakevens. From what I've read, US shale's breakeven is $50. Now OPEC's $60 is likely going to be needed to get adjusted for inflation. Meanwhile, I would think that technological advances by deep water and shale might result in even lower breakeven targets.
If the goal is going to shift towards just pump pump pump, OPEC might find themselves not able to compete at their social cost of production. Some countries are taking action now to diversify their economies and therefore reduce the required social cost of production. As the paper states and is being discussed elsewhere, Saudi Arabia has a Vision 2030 to reduce its dependence on oil.
For the long-term (20 - 30 years), nations that are dependent on oil revenues to fund their governments are in a race against the peak demand future. Those nations that can successfully diversify their economies will be able to compete and perhaps even under-cut US shale and deep water drillers. Those who are not able to transform their economies will likely find themselves dealing with social unrest/upheaval. I think two key countries to watch are Saudi Arabia and Venezuela. Saudi Arabia is obviously attempting to diversify their economy. I haven't come across anything that states that Venezuela is attempting the same. In the long-term, I'd bet that OPEC ends as an entity, split between those who had the vision to shift their economies versus those who didn't have the vision.
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