Oil is the most tradable energy commodity due to its energy density and portability. The crude oil price drives the cost of diesel on farm and other fuels (such as LPG) as well influencing the cost of transport on and off farm. The oil price also influences the price of grains and oilseeds through biofuel production and use. Oil is currently trading at $77/barrel, red diesel at 0.82/l and derv at £1.52/l down from recent highs.
Monthly red and road diesel, crude oil prices
Crude oil and the energy transition
Any forecast of future oil prices is extremely contingent on a range of external geopolitical and technological factors. The largest new driver is likely to be the energy transition away from fossil fuels towards renewable energy, EVs (electric vehicles) and battery storage. These changes are already underway with the rise in EV’s expected to reduce oil demand by up to 7.8M barrels per day (bpd) by 2028. The International Energy Agency (IEA) estimate a range of price scenarios to 2028 with the high forecast following historic 2.5% annual price increases. The low scenario indicates the impact of a more rapid energy transition.
Alternative Price Scenarios
Source: IEA, Oil 2023
Factors that could weaken oil prices
- Supply growth in the years ahead to be dominated by more open market-based US and South American suppliers – not cartel-based OPEC or Russia.
- Oil demand growth is slowing this year due to a weakening global economy.
- Oil demand could peak as early as 2025, due to fuel efficiency gains in vehicles and the growth of Electric Vehicle use.
Factors to support oil prices
Oil prices are not expected to return to historically low levels due to;
- Global demand particularly for travel is still rebounding from the COVID period.
- OPEC + including Russia have planned production cuts (but implementation is poor).
- The need to maintain investment in new production and counter the long-term trend of less efficient oil extraction (due to deeper wells, further offshore, shale extraction) means that low prices for too long will quickly impact production outlook, boosting prices.
- Oil remains extremely vulnerable to geopolitical events. A key benefit of a successful energy transition is that greater efficiency of oil use, move to EVs and diversification of supply away from OPEC+ producers could greatly reduce longer term vulnerability – but that point is 5-10 years off.
A business-as-usual approach to the future is likely to mean that oil will become more expensive over time whether due to resource scarcity, decreasing energy return on energy invested or concentration in the hands of autocratic regimes.
A successful energy transition would mean that oil will become less relevant as alternative technologies (e.g. EVs) and greater efficiency of use reduces its impact.
Just like the wider economy, farm businesses stand to gain from the energy transition through long term improvement in energy efficiency and self-generation. Cost and market pressures will also support the adoption of fuel efficiency measures and more resource-efficient techniques. These include reduced tillage, rotational grazing, and improved health and productivity of crops and livestock. Taking steps to pilot and implement energy saving methods now will pay off into the future as wean ourselves off expensive and unpredictable fossil fuels.
Julian Bell, email@example.com
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