Supply Chain Managers Should Know >> The Future of Oil

Nothing seems more valuable in modern times than oil. It would be no exaggeration to say that countless men have gone to war for this liquid gold. Oil serves as the spine upon which numerous industries and countries’ economies are built. 

The freight industry sector, for one, is sensitive to changes in oil supply and price. Its growth is dependent on the availability of oil, among other things. Profit margins can be affected by how expensive oil will be. Supply chain managers will greatly benefit if they are kept informed as to how the oil market will fare in the next few years.

At Atradius, they recently released a report called the Oil Market Outlook, which would give supply chain managers—notably in the transport sector—some idea as to what to expect in future, including the future price of oil. Atradius’ knowledge of the oil industry is extensive: their analysis and risk assessment of oil producing countries and of the oil market in general is crucial to their broader task of risk management and of supporting their customers in their credit management.

They have found in the course of their research 5 important points that the transport industry—as well as other businesses—have to understand about the oil market.

The main development—if not revolution—in the oil market has been on the supply side.

The historically high oil prices over the past decade have allowed investments in production outlays that were previously not economical. Helped by technological developments, North American oil production in particular has expanded from tar sands and light tight oil. This has pushed up marginal costs of production in the industry but also helped boost oil production in the OECD countries and across the world. Total global oil production is expected to rise steadily the coming decades with North America, Iraq, and Brazil being the main sources of production growth.

The rise of emerging economies has spurred demand for oil.

Whereas in the OECD countries, energy efficiency is the buzzword and consumption is sliding, the reverse holds true for the emerging markets. The emergence of a car owning middle class, developments in the freight industry, and infrastructure have pushed up demand, driven by what is now the second largest economy in the world: China. The trend is likely to continue. Moreover, as Chinese demand moderates over time as its population ages, India, with its vast population and potential for economic growth, is likely to increase its demand. Growth in demand for oil is therefore set to continue in the coming decades.

Confronting long term supply and demand developments leads to a structural supply deficit.

To make up for this deficit, oil price will have to rise to a level of around $130, in today’s money, by 2035. That gradual rise may be subject to significant fluctuations along the way, which are hard—if not impossible—to predict. They will fall prey predominantly to swings in the global business cycle and political events such as wars and sanctions triggering supply disruptions. The role of Saudi Arabia and possibly Iraq in the future in containing these swings may perhaps erode somewhat but will remain critical.
As the $130 oil price is an estimate for the longer term, tentative boundaries need to be set as to where the longer term oil price may end up.

We consider that, given the growth prospects in the emerging markets and the increasing costs of additional production, oil prices are unlikely in the long term to end up below $80, again in today’s money. At the same time, energy savings and a threatened production boost at a high oil price level will probably keep long-term prices below $150.

Financial factors do play a role in oil price determination.

However, not in the manner commonly assumed. There is scant empirical evidence of these factors having significant direct impact on the oil price. However, exchange rate and monetary policy do have an impact on the economy as a whole and therefore ultimately affect the price of oil.

We would like to say though that while this forecast is informed and well-researched, supply chain managers in the freight sector have to be aware that political and social events may change how the oil market will fare in the coming years. What is important is that managers are informed and equipped to navigate through whatever the future will bring—whether they are massive waves brought by a storm or placid, serene waters gently hitting the edge of the managers’ oars.