OPEC has taken a policy of inaction when it comes to oil prices so let’s look at some possible consequences.
On the demand side, there are two major threats to oil prices: in the short-term, many developing economies, especially China, have seen their growth forecasts and, by extension, their oil demand forecasts cut significantly; and in the long-term, the transportation sectors of the world need less oil every year due to technological advances in fuel efficiency, electrification, and automation.
China’s enviable growth rate is declining and its leaders have finally admitted that the country’s massive, unsustainable industrial overcapacity needs to be cut down to size.Unfortunately for OPEC, the overcapacity cuts mean the loss of industry that drinks up a large amount of oil imports. In addition, the many countries that relied on China’s growth to fuel their own economies are also facing possible recessions. While India may eventually drive global economic growth, for now there is no nation that could come close to creating the same level of oil demand growth as China.
While the loss China’s reliability is surely traumatic for OPEC producers, demand for oil tends to move in cycles anyway, increasing and decreasing with an overall trending upwards. It is that trend upwards that is now in danger. The real specter looming over oil producers is the threat of diesel and gasoline losing their place as the primary transport fuels of the world, since they are, by far, the most consumed oil product and the reason why crude oil is so valuable a commodity.
As if the creep of fuel efficiency standards was not doing enough to reduce oil needs over time, mass-market electric cars are set to disrupt the transportation industry as silicon valley giants square off against traditional automakers. A large amount of the blame falls on Tesla Motors as it accelerated electric car development programs beyond all expectations, claiming it would sell hundreds of thousands of Model 3 electric vehicles by 2018.
And, who could forget, self-driving cars are just around the corner as well. Autonomous vehicles adding another layer of uncertainty to future oil demand as the balance between more efficient driving and increased usage remains unclear.
With so many threats and so few opportunities for oil demand on the horizon, it is much easier to understand why Saudi policy makers are encouraging solar panel installations and preparing for a post-oil world.