The price of oil until now has served as one of the main economic variables defining a country’s performance. For exporting countries, high oil meant extraordinary revenues and possibilities for economic development “out of the blue”. For importers, the effect was the opposite. Cheap oil was positive for economic growth while expensive oil tended to catalyse lower growth and even economic recessions.

Perhaps this is the main reason why in recent decades there has been a certain balance in this price, which, despite its cyclical nature, has tended to trend towards a value that was good for producers, but not excessively harmful for buyers. Let us not lose sight of the fact that the oil market is not an idealised market that responds to supply and demand, but one that is cartelised by producers, related to geopolitical issues, etc. This equilibrium price was between $30 and $40 a barrel from the mid-1980s to the mid-2000s, and above $50 or $60 dollars in more recent times, such as the second half of the last decade. These periods of stability alternated with crises of a different nature: the oil crisis of the late 1970s, the financial crisis of 2008 and the events of the following years, and finally the pandemic, leading to supply chain problems, in addition to the war in Ukraine.

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Understanding these issues and this historical development, one thing that is surprising is the maintenance of the oil price at very high levels since the end of the 2020 confinements. These prices do not correspond to the global demand for oil, which peaked in 2019, nor to the capacity to produce it, as there is under-utilised capacity in OPEC countries. The reason is simply the willingness of the producers, namely OPEC and Russia, to make this happen. In fact, one of the things we have seen over the last three years is that, when oil began to fall on the markets, these countries agreed to a further reduction in production in order to keep the price at around $80 a barrel.

The reason for this change, I think, can be gleaned from a recent statement by an OPEC official in response to the latest report by the International Energy Agency (IEA). The IEA recently predicted that peak demand for all fossil fuels, including oil, would occur during this decade. Such a forecast was shocking coming from the IEA, which has always been very conservative when it comes to energy forecasting. OPEC reacted with disdain to this forecast, saying that the IEA was responding to Western interests and that this would not be the case because the world will need a lot of oil for decades to come.

The OPEC representative, perhaps unintentionally, expressed a central geopolitical issue: The West’s interest is indeed that oil consumption declines, because Europe (except Norway) is not an oil producer, and the US, although it is, is not a country with excessive reserves (it is the world’s largest producer but eighth in reserves, below most OPEC countries and Russia). For producers, on the other hand, it is in their interest that oil revenues continue for as long as possible.

In this geopolitical conflict there is a third actor that, despite its more silent position on this issue, is of enormous relevance as the world’s second largest oil consumer and the one that has practically single-handedly sustained the increase in demand over the last 15 years. It is China, which is undergoing a rapid energy transformation that is viewed with scepticism from the West but which has explosive characteristics. Specifically, the sale of electric vehicles in China continues to grow exponentially, with around 6 million plug-in cars sold last year, a figure that has already been surpassed by 2023. The market share of these vehicles is close to 40%, and the specialisation of Chinese companies in this type of vehicle suggests that the figures will continue to rise at full speed.

About 30% of global oil consumption is used for light-duty vehicles. In China, additionally, vehicles such as buses and trucks are also being electrified, and this therefore represents a potentially huge wedge for global oil demand. Some estimates suggest that peak oil demand in China could occur as early as 2023. China is no longer going to be propelling the increase in oil consumption, it is going to be reducing it.



China’s motivation goes beyond the fight against climate change and the construction of what they call an “ecological civilisation”, it is also a question of dependence. China is not a producer of oil or natural gas, and for the sake of energy sovereignty, it is logical to replace the technology that uses these fuels with technology that can be mobilised with its own energy sources, such as electric vehicles. China’s ambivalent relationship with coal is also explained in these terms, as it is the only fossil fuel it can consider its own resource.

The trend towards electrification of transport is inevitable and will affect oil demand in the very short term. In this context, the anomaly of keeping oil above its equilibrium price of interest may make sense. Is OPEC trying to maximise the revenue from its oil before demand collapses? I think this is a plausible explanation. Because unlike in the past, when fuel demand clearly reacted to price, and high costs drove efficiency measures, which were abandoned when the price normalised, there is now a technological substitution that cannot be reversed with cheap oil. Selling as much as you can for as long as you can seems the most profitable option.

I believe that in Europe we should make policies with the view that the price of oil, and other fossil fuels, will remain structurally high. We may see natural oscillations in its price, but the dynamics that drive up prices seem clear. Conflicts such as the one we are currently experiencing in Gaza are geopolitical time bombs that can catalyse even more aggressive price rises, especially if they involve producer countries such as Iran.

Fortunately, our economies have been far more resilient to high fossil fuel prices than has been the case in the past. Having the technological alternative in our hands should also give us an optimistic outlook. If we were to devote half as much effort to the energy transition as we do to other issues, within a decade we could free ourselves from much of the energy dependence that has caused us so much trouble and economic discomfort in the past.