The latter half of 2014 has been an extraordinary period for global energy markets, with oil prices falling from highs of $116 to $80 per barrel.
Whilst our forecast expects oil prices to stabilise and rise moderately next year, there is a risk that they could stay lower for longer which could have dramatic and far-reaching implications.
Using our Global Trends Service, we illustrate the likely outcomes of two years at $80 per barrel Brent and $70 per barrel for West Texas Intermediate (WTI) prices.
1. Russia will come under pressure
As the world's largest energy exporter, Russia is particularly susceptible to fluctuations in global energy prices but the timing of the current slump is particularly problematic as EU and US sanctions start to bite.
Although the government insists it could sustain itself on an oil price of US$60-70 per barrel, we are sceptical. Assuming Brent averages $80 for the year and the rouble remains at its current rate (46 to the US$ at time of writing), Russia's economy could contract by up to 2.5% in 2015 - although this is still unlikely to affect Vladimir Putin's popularity as President.
2. The Middle East will become more complex
Iran faces the prospect of no sanctions relief just as oil prices settle into a lower range. Government budgets will be cut and unpopular subsidy reform may have to be accelerated.
In Iraq, low prices threaten long-term production growth but could represent an opportunity for China to extend its influence in the region. Competition will also be a concern for Saudi Arabia as it has to balance the conflicting incentives of maintaining market share in Asia and unwillingly providing opportunities for other producing countries.
3. Corporates will be forced to adapt
We see cash flow for the largest 60 companies falling to a deficit of US$90 billion, versus a surplus of US$70 billion at US$100 per barrel.
Corporate strategies will gradually adapt to the lower price environment. The first reaction will be to pull back in discretionary spend and, if companies believe a lower oil price environment is to be prolonged, internal planning assumptions will be revised which will make project sanction harder.
4. US tight oil production growth will remain resilient
US tight oil is a favourite for investors seeking returns in an oil market characterised by high costs. Breakeven levels vary, but our latest analysis shows that current production is economic well below current oil prices – at around $70 per barrel WTI. Weakening oil prices are so far not a material threat to US tight oil or the industries that surround it.
5. Energy importers will benefit and the commodity cycle will accelerate
Europe, as well as the key economies of Asia Pacific, are dependent on imported energy and for these markets a current lower oil price is beneficial, particularly as the Eurozone and Japan are both flirting with recession. Falling prices mean China will pay less for its oil in 2015 than it did in 2010, when import demand was far lower.
Overall, our macroeconomic analysis indicates that two years of Brent at $80 would represent a boost to the global economy, although it would also be enough to delay or cancel investments in higher-cost oil production.
Resurgent demand and delayed production growth would inevitably be followed by a sharp recovery in oil prices and rewards for those who have weathered the storm. Just how energy companies position themselves through the dip will be critical to their success if this scenario materialises.
Follow Paul McConnell, the author of this report and our Principal Global Trends Analyst, on Twitter @WMPMcConnell.
Low oil prices for two years – five outcomes of an $80 Brent world [Subscription required]
Find out more
We offer a wide range of strategic analysis and insight on global trends and geopolitical issues, across all fuels and sectors of the energy industry.
Our Global Trends Service brings together our analysis of macroeconomic trends and examines the implications on global energy supply, demand, prices and inter-regional trade flows.
To find out more about how we can help you identify risks and understand opportunities, send your details via the 'Register Interest' button below and we will contact you.