World Energy Outlook 2006

In the longer term, price trends will hinge on the investment and production
policies of a small number of countries – mainly Middle East members of the
Organization of the Petroleum Exporting Countries (OPEC) – that hold the
bulk of the world’s remaining oil reserves and on the cost of developing them.
The assumed slowly rising trend in real prices after 2012 reflects an expected
increase in the market share of a small number of major producing countries,
together with a rise in marginal production costs outside OPEC. Most of the
additional production capacity that will be needed over the projection period
would logically be expected to be built in Middle East OPEC countries. The
resulting growing concentration of production in these countries will increase
their market dominance and, therefore, their ability to impose higher prices
through their collective production and investment policies. It is nonetheless
assumed that they will seek to avoid driving prices up too much and too
quickly, for fear of depressing global demand and of accelerating the
development of alternative energy sources.
Natural gas prices are assumed broadly to follow the trend in oil prices, because
of the continuing widespread use of oil-price indexation in long-term gas
supply contracts 5 and because of inter-fuel competition in end-use markets.
Some divergences in oil and gas prices and between gas prices across regions are
nonetheless expected. Increasing gas-to-gas competition will put downward
pressure on gas prices relative to oil prices in some markets, but this factor is
expected to be offset to some degree by rising supply costs – notably in North
America and Europe. Increased short-term trading in liquefied natural gas
(LNG), allowing arbitrage among regional markets, is expected to contribute
to the convergence of regional prices over the projection period. International
steam coal prices have risen steadily in recent years on the back of rising oil
prices and strong demand, particularly from power generators and steel
producers. The price of OECD steam coal imports is assumed to fall back
slightly from a peak of $62 per tonne (in year-2005 dollars) in 2005 to around
$55 in the next few years and then to increase slowly to $60 by 2030.
Technological Developments
The pace of technological innovation and deployment affects the cost of
supplying and the efficiency of using energy. Our projections are, therefore,
very sensitive to assumptions about technological developments. In general, it
5. The share of global gas supply that is traded under contracts with explicit oil-price indexation
clauses is probably at least one-third and may be as high as half. Much of the remaining share of gas
supply is not traded commercially. Almost all long-term contracts in continental Europe, which
account for well over 95% of bulk gas trade, include oil-price indexation. Gas prices are indexed
against oil prices in some way in virtually all long-term LNG supply contracts. In contrast, most gas
is priced against spot or forward gas-price indices in North America and Great Britain.
Chapter 1 - Key Assumptions 63
© OECD/IEA, 2007
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