The next oil super cycle will hit hard
Commodities markets are very volatile. Prices can go up and down greatly over a short period. Super cycles, on the other hand, can extend for many years.
The oil market today is shaped by two super cycles: The first appeared between 1986 and 2000, and the second lasted until 2014.
In the first super cycle, oil prices remained low, averaging around or below $20 a year — with the exception of 1990, when prices averaged $23.73 due to the Gulf War — according to data from British Petroleum Statistical Review.
There was an interim period of three years between the first and second super cycle. Oil prices edged a little higher between 2000 and 2003 but they were capped at below $30. From 2004, oil prices took the opposite direction from the previous super cycle and kept on rising.
A main feature of the first super cycle was OPEC’s mismanagement of the oil market. Oil prices were subdued for 14 years because demand weakened and supply from outside OPEC grew strongly. This was because OPEC allowed oil prices to rise to a very high level in the period up to 1986. That drove production from difficult offshore areas and incentivized consumers to look for alternatives.
Due to a lack of proper investments in oil projects between 1986 and 2000, OPEC and others were not prepared for the second super cycle, which was mainly shaped by the rise in demand from emerging markets led by China and India. Suddenly, China and India needed millions of barrels of oil to fuel their economic growth and the world did not have enough capacity inside or outside OPEC. Back then, the world relied on conventional oil that takes years to be explored and developed; therefore, supply lagged behind demand and prices kept rising.
This is no longer the case. Since 2011, high oil prices allowed technology to unlock oil that was once thought very difficult to recover. Unconventional oil resources boosted world oil production between 2011 and 2014.
In 2014, the market took a different direction. China’s economy was no longer growing in double digits. The cost of renewable energy went down. The market became awash with oil thanks to the shale oil revolution and deep-water drilling. The result was a sharp fall in oil prices and a glut that reminded everyone of the 1980s.
The super cycle of 2004-2014 may be coming to an end and a new one emerging. Oil prices might stay low for a decade as there are still more undeveloped shale areas in the world and alternative energy is gaining more ground.
Some major oil companies are already preparing for a scenario of “lower for longer” for oil prices. Royal Dutch Shell sees the peak of oil demand in the 2030s while Saudi Arabia and other OPEC members still see demand peaking in the 2040s or 2050s.
It is better to prepare for the worse than hope for the best. OPEC needs to realize that the next super cycle will hit everyone harder than the 1986-2000 low-oil-price cycle.
Why would it be harder? First, the population of OPEC states has boomed since the 1980s and 1990s. Second, there have been more aggressive technological breakthroughs this time. New techniques are unlocking more crude everywhere; electric cars will in a decade’s time replace tens of millions of combustion-engine vehicles. Third, there is no big consumer of energy on the horizon that can surprise everyone like China did in the early 2000s.
So how can OPEC prepare for the future? First, member states need to change their economic models. They need to diversify their incomes. Local industries must be developed to limit the need to import manufactured goods from abroad and to create more jobs. So far the Saudis are starting to do this but others need to follow. Second, they need to put aside their differences and discussions of short-term oil trends and prepare for a “lower for longer” scenario. Given the current situation, OPEC cannot target high oil prices — but it can defend a reasonable floor. Many OPEC countries like Venezuela are still hopeful of seeing oil prices of $70 or more. Hope is good but too much makes a country unable to see the future clearly — and makes it captive to high oil prices. That is what Ahmad Zaki Yamani warned OPEC about in the late 1970s, but no one bothered to listen.
• Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi
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