International oil prices have been remarkably stable over the last three years, trading in a fairly narrow range between $100/bl and $120/bl, with the exception of a few brief dips into double-digit territory. This price stability has reflected a fine balance between world oil demand and supply. But various factors are threatening to upset this equilibrium in the medium term.

On the demand side, the International Energy Agency (IEA) recently forecast a 1.32- million-barrel-a-day increase in global oil consumption this year, compared with 2013. Much of the increase in demand is coming from China, whose crude oil imports reached an all-time high of 6.8-million barrels a day in April. China’s thirst for oil stems partly from its growing refining capacity and also from the prodigious growth in vehicle sales, which are projected to reach about 20-million units this year. But the IEA also suspects that Beijing is filling a recently finished extension of its strategic petroleum reserve.

The agency has warned that industrialised countries may encounter an oil supply shortage in the second half of the year if the Organisation of the Petroleum Exporting Countries (Opec) does not ramp up its output by about 900 000 barrels a day.

On the supply side, however, there are several factors which cloud the outlook over the coming months and particularly in the next few years.

For one thing, several members of the Opec cartel are encountering difficulties in maintaining production rates. This is mainly due to political instability – ongoing fallout from the Arab Spring in countries such as Libya and Syria, a deteriorating security situation in northern Iraq and turmoil in Venezuela and Nigeria. Further, a substantial amount of Iran’s export capacity is shut in by US and European Union sanctions. Also, rapid growth in demand within the rich and more stable Gulf States, such as Saudi Arabia, Kuwait and the United Arab Emirates, is putting pressure on these countries’ oil exports.

Another flashing warning sign is that the oil ‘super majors’ – ExxonMobil, Shell, BP, Chevron and Total – are experiencing a significant cost squeeze. With four-fifths of the world’s oil reserves in the hands of national oil companies, the independents are having to scour the globe’s remotest areas, looking for new oilfields – such as deep offshore and polar regions, as well as in less politically stable countries. Consequently, the majors’ spending on exploration and production has ballooned enormously in recent years. Exxxon, Shell and Chevron together spent $120-billion last year alone. Despite this massive investment, the combined oil output of the super majors has been declining since 2005. Early this year, several of these oil giants announced that they would have to curtail upstream investment, which may lead to further supply falls in coming years.

The major oil success story in recent years has been the impressive growth in US ‘light tight’ oil – oil produced by hydraulic fracturing of difficult rock types, such as shale. But even here the picture is becoming less rosy. Tight oil production growth in the leading states of North Dakota and Texas has slowed down markedly in the last half year. Extensive analyses by two sets of independent experts last year came to the conclusion that production from these states could peak by 2017.

In a shocking announcement last month, the US Energy Information Administration said that it had slashed its estimate of recoverable oil reserves in California’s Monterey shale basin from 13.7- billion barrels to a mere 0.6-billion barrels – a staggering downgrade of 96%. This lowers the estimate of total recoverable shale oil in the US by a whopping 60%. It also casts serious doubt on the Department of Energy’s forecasts of future production from other major shale basins in America.

Back in 2011, the IEA produced a report that delved deeply into rates of production decline in existing oilfields across the world. They found that the average rate of decline in output from active wells was around 6% a year. This means that, each year, the oil industry must bring about 5.5-million barrels a day of new production on line, just to offset production lost from depletion. To put that into perspective, the world’s second-largest producer today is Saudi Arabia, which pumps about ten-million barrels a day – much of which comes from supergiant fields that were discovered more than half a century ago.

The relative stability in oil markets over the last few years should not lull us into a false sense of energy security. Despite a temporary respite afforded by the boom in US tight oil, the long-term drivers of depletion, rising production costs and growing demand in developing countries will continue to exert upward pressure on oil prices. A sudden supply shock could send the crude oil price skywards again, with devastating effects on a fragile world economy and financial system.