Despite plentiful supplies of fuel and low prices, energy security is a global concern. The fear 30 or 40 years ago was that supplies would be cut off by Opec or Russia, but that has changed. Now, the focus is on the impact oflow prices on social and political stability, China’s growing dependence on imports and the longer-term threat of climate change. The effect of low prices on stability is already being felt across the Middle East. The oil price is now just over half that of six years ago – it has fallen as much as 20 per cent since the turn of the year, with the latest downward pressure linked to the economic impact of the coronavirus in China.
The loss of revenue for oil-producing countries comes on top of other problems in the region such as rising populations and high unemployment, low productivity, weak governments and, in specific cases such as Iran, the impact of sanctions. Low prices could further discourage investment in new oil and gas supplies. The world is not about to stop using oil, and more development will be needed to replace declining output from existing fields.
Facing reduced income, many state oil companies – not least in Opec countries – are likely to limit investment. The private sector, including the major international companies, will also experience a fall in income but still face pressure from shareholders to maintain dividends. An easy option then is to postpone investment, particularly in projects that require higher prices, such as discoveries in ultra-deep water.
Private companies may also avoid areas where the risks are high and physical security cannot be guaranteed. Sanctions keep most international companies out of Iran, for instance, while recent events in Iraq have led some companies to step back from plans for investment.
The net result of all these factors is that future production could be lower than the upward trend of demand being driven by population numbers and economic growth in emerging economies.