Section One

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non-energy commodity prices, especially cement and steel, which account on average
for close to half of upstream costs; 6 the nature of the relationship between prices
and costs, for example, higher prices encourage activity in higher cost areas, but this
is not necessarily indicative of a change in cost structure; 7 and the rate and nature
of technological progress.
All this shows that marginal cost estimates might provide an imperfect signal for
long-term price paths. This route nevertheless remains a key element in making sensible
assumptions for sustainable long-term prices. There could be many plausible
outcomes of the conflicting pressures between technology and depletion; however,
the available evidence of both current cost structures and the ability of technology
to bring costs down, especially for non-conventional resources, as well as to expand
the resource base, continues to be a key driver in the assessment of Reference Case
oil price assumptions.
now have a far lower impact upon the global economy than in the past, given that
today less oil is now used to generate each dollar of gross domestic product (GDP).
For example, over the three decades between 1980 and 2010, OECD oil intensity fell
by 49%, while in developing countries it fell by 30%. Research into the past impacts
of oil prices on economic growth also suggests that monetary policy responses at the
time of earlier price spikes were responsible for much of the growth slowdown. 8 Moreover,
there is growing recognition that high oil prices have had little impact upon the
economy and the recent recession.
It has also become accepted that oil price movements have relatively low direct
impacts – though not zero – upon oil demand: high tax levels; exhausted
options for substitution away from oil; and, low price elasticities in the transportation
sector are key factors in this regard. However, there is also the often neglected
impact of large price changes upon demand. This driver can be described as the
asymmetric price elasticity of oil demand, since price increases affect demand differently
to price falls, but it is also the result of non-linear elasticity. Thus, this
poses an additional technical limit to how high oil prices can be assumed to go in
the Reference Case.
Attention has also been paid to the impact of the dollar on prices. It is true that
there has been a substantial weakening of the dollar in recent years. In January 2003,
the €/$ rate averaged 0.94, but this had fallen to 0.68 by January 2008, a depreciation
of close to one-third. This is one factor behind the gradual upward revision to
oil prices that has been underway in recent years. Nevertheless, there is no reason to
attribute the change in price behaviour since the release of the last WOO to changes