Oil Market Surge: Earlier this year, the International Energy Agency (IEA) published a report in which it projected that by 2030 the world could see an oil surplus of as much as 8 million barrels per day (bpd). This large excess is the result of modernisation; changes to consumption and patterns, and the application of policies to reduce CO2 to fight climate change. In this note, we explore the factors that influenced this expectation, its ramifications for global markets, what that might mean for the economy and geopolitical landscape, and how some of the world’s biggest oil-producing economies could respond.
To the reasons for the oil glut it would already see
To meet that demand, the world would have to produce 8 million bpd more crude than can be justified under the IEA’s outlook. For starters, renewable energy technologies are rapidly advancing, substantially lowering the cost and increasing the functionality of solar, wind and battery systems. That’s why many countries are turning more and more away from fossil energy into a cleaner future. Meanwhile the move to EVs would be a market-changing event as the transportation sector, one of the largest consuming segments of oil, would be hit hard.
Second, efficiency measures are being adopted in a wide array of industries, which is causing a reduction in oil consumption. Around the world, governments are tightening these standards and offering inducements to use less energy and more efficient technology. The energy intensity of the global economy is falling, but this is less the case in developed countries than it used to be, as their energy-GDP rate of improvement has flattened.
Finally, the global move toward a low-carbon economy, rooted in international pacts like the Paris Agreement, is slamming the brakes on fossil fuel consumption. Typically, those will have aggressive targets to cut CO2 emissions, many of which will involve reducing oil consumption. For example, several countries are now pledging to ban ICE vehicles and reduce the share of renewables on their grids.
Global Oil Markets Implications
The expected surplus of oil has powerful implications for the global gengtoto oil markets. What would likely ensue immediately is downward pressure on oil prices. An excess of about 8 million bpd is adding about 4 to 5 million bpd every month to supply and if demand hasnt increased in tandem with supply, prices are going to drop. While this may be good news for oil-importing countries as lower energy costs mitigate inflation pressure, it provides a headwind for those oil-exporting countries that are heavily dependent on oil revenues.
The oil sector could also face less investment with lower oil price. In an era of less appealing margin structures, however, oil companies may cut back on their exploration and production operations. Regionally, the drop in investment could also have implications for the long term oil supply, with a possible risk of shortages in the future if demand does not decrease as expected. In addition, cheaper prices could render uneconomical the production of oil from more costly alternative or difficult-to-reach fields, including deep-water and Arctic resources.
The oil glut could also add to the volatility in the markets. Oil markets are already inherently exposed to geopolitical events, supply disruptions, and demand changes. In the worst-case scenario, oversupply could both heighten and broaden the volatility with more abrupt and pronounced price spikes. That kind of instability could make life difficult for oil producers and consumers planning or setting investment strategies.
Implications – Economic & Geopolitical
The implications of the predicted oil surplus on the economy and geopolitical landscape are vast. Low oil prices could exacerbate economic difficulties for oil-exporting countries, especially those with economies heavily dependent on oil revenues. Saudi Arabia, Russia, and some other members of the OPEC cartel are left with growing budget deficits, prospect of having to cut public spending and overall economic instability. However, many of these exports rely on oil, and further effective integration does not absolve these nations of diversifying their economy away from their dependence on oil revenues, which is a laborious and slow process.
Geopolitically, an oil surplus could reconfigure influence among oil producers and big energy consumers. As oil prices are suppressed from sustained, long-term levels from renewable energy, traditional oil powers like Saudi Arabia and emergent oil superpower Russia may be less influential as they lose their economic edge. Instead, those will be countries, like China and Germany, that have invested huge sums on renewables and efficiency, such Dr. Oteng-Adjei said. The US – a major player in shale oil production – could be in a trickier position going forward, weighing up cheaper oil for consumers without curbing its domestic oil industry.
This excess could meanwhile affect trade flows worldwide. Clearly, oil-importing countries would benefit from cheaper energy costs (which would improve the trade balances and the international economic competitiveness of nations). On the other hand, oil exporting countries may experience in fall in their outside surplus, and may enter price-based currency depreciation and inflationary pressures.
Oil Producer Strategies
Owing to the projected glut of oil, key producers of oil will introduce multiple mechanisms to relieve adverse impacts on their economies. One way is to create robust economies that are not reliant on oil. Including Saudi Arabia, are already embarking on ambitious economic diversification plans led by the vision of 2030 to build tourism, entertainment, and technology tradition of development.
A second option is to improve efficiencies and progress the lowering of production costs within the oil sector. Oil producers, by leveraging next-gen technologies and streamlining their operations, can continue to compete with lower prices and margin cuts. Such savings can be realised by investing in digitalisation, automation and advanced oil recovery methods.
This might also lead these oil-producing countries to forge new pacts and reinforce the older ones in order to better manage the global oil market. OPEC and its allies, an informal group known as OPEC+, cobbled together previous production freezes to prop up prices. Critically, similar measures may be needed in the future to address the excess that we anticipate is coming. But keeping coalitions united is difficult work, particularly when partners do not align economically.
In addition, oil producers could target new consumer centers and leaning more towards petrochemicals, which will allow them to migrate towards higher-grade final goods. Demand for petrochemicals, which are used of in everything from plastics and fertilizers to a variety of industrial goods, is expected to continue to rise even as demand for transportation fuels falls. Oil companies can target these products as well, opening new revenue streams.
The Innovation and Role of Technology
In the age of burgeoning surplus, technology and innovation are key in determining the future of the oil market. The energy landscape is already being shaped by developing renewable power technologies, energy storage and electric vehicles. Further advances in the first tw areas could drive beyond current projections the extent to which oil demand could be contracted, and the surplus built up.
Hence, the technological advancements within the oil sector can provide producers with tools to better react to the altered market dynamics as they arise. Digital can drive operational efficiencies, cost savings and decision benefits through artificial intelligence, big data analytics, and IoT (Internet of Things) technologies. For instance, AI-powered predictive maintenance can reduce machine downtime and help increase the life of machinery, whereas big data analytics can improve supply chain and logistics efficiency.
Carbon capture and storage (CCS) technologies can also be innovative and can help in the transition towards a low-carbon economy. CCS captures and stores CO2 emissions from power generation and industrial processes so that fossil fuels (which are responsible for the vast majority of CO2 emissions) can be used while minimising CO2 emissions to the atmosphere. This kind of technology could be a saving grace for the oil industry, giving it the ability to help meet climate goals without having to sacrifice production.
The Path Forward
A 8 million bpd oil surplus by 2030 (IEA) leads to some difficult prospects for the global energy landscape On one hand, this surplus may contribute to lower oil prices and greater market volatility, but it also pushes oil-producing countries to come up with new ways to innovate or diversify their economies and become more sustainable.
It is a reminder for policymakers about the need to invest in renewable energy, energy efficiency and innovative technologies. Governments could support the shift to a low-carbon economy that helps to alleviate the economic and geopolitical dangers of an oil surplus while preserving national energy security and addressing environmental constraints.
Meanwhile, consumers stand to pay less for power and have a robust and more diverse energy system. Choosing cleaner energy sources and increasing use of efficient technology can lead to healthier air, lower greenhouse gas emissi0ns, and economic growth. If you like reading this article then please consider reading our article about ANDHRA PRADESH.
