The New Economics of Oil… from the Heart of Oil Country

By Damian Brandy, Associate Director and Energy Practice Lead, FleishmanHillard UAE

November is going to be an important month for the global energy industry. The month is bookended by two interconnected and yet very different events, both of which will have a big effect on the future of global energy.

In the UAE, the Abu Dhabi International Petroleum Exhibition and Conference (ADIPEC) – the second largest oil event in the world – will bring together the regional and global energy community to rethink the new economics of global oil. Meanwhile at the end of the month in Paris for COP21, policy makers – together with an army of NGOs and environmentalists adding public pressure to the political process – will meet to address carbon emissions and the prevention of global warming.

The latter’s effect on the former will be profound.

The two events may seem disconnected, but the reality of climate change is altering the global view of oil in a big way. Now – perhaps for the first time – it is becoming apparent that the world may not exhaust its reserves of oil. The finite nature of oil has long protected its long-term value, but this scarcity-driven value will no longer apply if we never run out.

Climate concerns are not the only issue impacting the oil economy. Supply too has challenged value. In rough terms the world has consumed around 1 trillion barrels of oil, and yet increased proven reserves by the same amount over the last 35 years.

What’s becoming evident is that through a combination of advances in innovation and technologies that improve efficiency and reduce emissions, together with the shale revolution in the US, oil may never realize the scarcity value the industry was naturally inclined to assume it would. And in that reality, a medium to long term future of US$50 oil is by no means misplaced, meaning the industry must reanalyze the established principals of oil’s economics.

Oil has a long way to run yet, and a critical role to play in economic development – both here in the Middle East and around the world. And while we’re yet to see how the industry responds to this diverging landscape, at some point in the middle of December we will all have a better idea of how the fossil fuel business model will need to change. Possibly forever.