Assumptions for the Reference Case
2016: a turning point towards a more balanced market
Since the previous World Oil Outlook (WOO) was launched last December, the oil market has shown signs that it is heading towards a more balanced situation, despite continuing volatility and challenges remaining on several fronts. In January 2016, the OPEC Reference Basket (ORB) reached its lowest level ($22.48/barrel) since the price decline that started in the second half of 2014. It has since shown a general upward trend and over the past couple of months it has fluctuated in the range of $40–45/b. On the supply side, non-OPEC production has contracted this year, while demand remains relatively heathy at around 1.2 million barrels per day (mb/d).
Contributing to this more optimistic, albeit cautious, sentiment is the behaviour of oil stocks. Despite the current exceptionally high level of stocks, the pace of the build-up has clearly decelerated in 2016. In addition, the sharp decline in oil upstream capital expenditure (CAPEX) investment experienced in 2015 has slightly decelerated in 2016. Moreover, in some specific areas, investment is even coming back in a watchful fashion compared to last year. Overall, it can be said that, despite its fragile state, the oil market is in the process of readjusting.
Population growth increasingly coming from Developing countries, but growth decelerating and populace ageing
Global population is projected to increase by almost 1.8 billion people from 2015–2040 and surpass 9 billion people. The majority of the population increase will take place in Developing countries. By 2040, 81% of the global population will be in Developing countries, versus 78% in 2015.
Population growth rates have been steadily trending downward since the 1970s and this trend will continue in the future. Moreover, the overall age structure of the world is expected to shift towards an older population. Currently, 8% of the global population is over 65 and this is expected to increase to 14% by 2040, while the working age population comprised of individuals aged between 15–64 is estimated to decrease from 66% to 64%.
GDP growth gradually recovers to average 3.4% p.a. in the medium-term and then 3.5% p.a. in the long-term
Global Gross Domestic Product (GDP) growth in the Reference Case is assumed to gradually recover and accelerate in the medium-term to average 3.4% per annum (p.a.). Within the medium-term, average GDP growth in the OECD region is expected to improve from the current level of just below 2% and stabilize at around 2.2% p.a. Growth in Developing countries is also expected to improve over the medium-term, from 4.4% in 2016 to around 4.9% p.a. during 2018–2021. In Eurasia, medium-term growth is anticipated to accelerate as a result of geopolitical improvements and less instability. Long-term global economic growth for the period 2015–2040 is assumed at 3.5% p.a. Growth is mainly driven by Developing countries, which has an estimated average growth rate of 4.6% p.a. over the forecast period. Within Developing countries, GDP growth in India and China is especially noteworthy, with rates estimated at 6.9% p.a. and 4.9% p.a., respectively, over the forecast period.
China and India increase their GDP share of the world economy, as the OECD region grows at a slower pace
The size of the world economy in 2040 is anticipated to be 234% that of 2015. The overall GDP increase is estimated at almost $141 trillion (2011 Purchasing Power Parity (PPP)). Most of the growth will come from Developing countries, which will account for three-quarters of the total increase.
In fact, there will be significant changes in the distribution of the global economic pie. By 2020, China will overtake OECD America in terms of real GDP and, by 2040, China’s real GDP will be more than 1.5 times that of OECD America. India will surpass OECD Europe around 2034 and, by 2040, India’s real GDP will be about the same size as OECD America. The global share of real GDP in the OECD region is expected to decrease from 45% in 2015 to 32% in 2040. Separately, India and China will see an increase in their combined global share of real GDP from 24% in 2015 to 40% in 2040.
Energy policies continue to focus on emission reductions
The Reference Case takes into account numerous energy policies that are already in place. Additionally, the Outlook accepts the fact that the policy process will evolve over time. Therefore, new policies are assumed to be a reasonable extension of past trends and a reflection of the current debate on policy issues. These focus primarily on measures to achieve emission reductions.
Oil price assumption echoes expected gradual improvements in market conditions
The average ORB price for 2016 is expected to be around $40/b. In the medium-term, the price recovery is assumed to continue with $5/b increments in the period up to 2021. With this, the ORB price reaches a level of $65/b by 2021 in nominal terms, slightly above $60/b in real 2015 prices. This assumption reflects expected gradual improvements in market conditions. In the long-term, prices are assumed to reach a level of $92/b by 2040 in real ($2015) prices, which is equivalent to $155/b in nominal terms. It should be stressed that these are neither price forecasts nor a desired price path for OPEC crude, but working assumptions that help guide the development of the Reference Case.