Industry Needs $55 Oil, but Alternative Energy Could Result in $10 Oil Within a Decade

A new report by Wood Mackenzie pegs $55 per barrel as the price required for companies to become cash flow positive in 2017.

Partial, rather than full compliance on the part of Organization of the Petroleum Exporting Countries (OPEC) members in meeting their production cutback commitments will be a good thing for the oil and gas sector: that's the implied message from a new report by Wood Mackenzie, which pegs $55 per barrel prices as the sweet spot required for companies to become cash flow positive in 2017.

Angus Rodger, research director for upstream oil and gas for Wood Mackenzie, said, "If we stay (at $55 a barrel), the world's biggest oil companies start to make money again; if we go back down to $50 (or lower) in 2017...then those companies are in the negative territory and they go back into survival mode where they have been in the last two years."

Rodger added that oil will average $57 per barrel if a compliance level of about 75 percent is achieved; presumably, anything more will tip the price balance out of the oil and gas sector's favour and trigger the undesirable effect of U.S. shale production's further recovery – which in turn could compel OPEC and non-member countries to abandon their cutback efforts.

Wood Mackenzie believes prices will average $55 in the next few quarters before hitting $60 per barrel by the end of 2017.

Meanwhile, Thierry Lepercq, head of research, technology and innovation at Engie SA, provided a longer-term view of where oil prices might go: he warned that five energy "tsunamis" may drag prices as low as $10 in less than 10 years.

Speaking to BloombergMarkets, Lepercq pointed out that "Even if oil demand continues to climb until 2025," advances in solar, battery storage, electrical, and hydrogen vehicles could cause its price to drop to $10 "if markets anticipate a significant fall in demand."

He went on to note that the number of battery and plug-in vehicles around the world has surged in recent years; hydrogen may be as cheap as liquefied natural gas in less than 10 years; and the cost of solar power will probably drop below $10 per megawatt-hour before 2025 in the world's sunniest places.

Moreover, Engie recently conducted an extensive modeling of the Provence-Alpes-Cote d'Azur region (population: 5 million) and concluded it could run entirely on renewables by 2030 for as much as 20 percent less cost than the current energy system.

Lepercq stated, "The promise of quasi-infinite and free energy is here."

But for the time being, $55 oil seems well within reach: Bijan Zanganeh, oil minister for Iran (which refused to go along with OPEC's cutback plan) earlier this week told media, "There are already indications that the price of oil is rising in global markets; predicting the prices is difficult, but I am certain that the prices will remain between $50 and $55 per barrel."