(CHEManager Europe 5/2012)     The world is very far from running out of oil. However, it's possible, though far from certain, that oil prices will spike in the years ahead. Emerging markets are still in the midst of a historic transition toward greater energy consumption. When global economic performance becomes more robust, oil demand is likely to grow faster than supply capacity can. As that happens, supply and demand could collide - gently or ferociously, says global management consulting firm McKinsey & Company.
The likelihood of oil price volatility combined with related uncertainties - such as the potential for swings in the dollar versus other currencies - makes it even more random as in the past to predict medium-term oil prices (compare Fig. 1).



One scenario that's sufficiently plausible and underappreciated: the prospect that within this decade, the world could experience a period of significant volatility, with oil prices leaping upward and oscillating between $125 and $175 a barrel (or higher) for some time. The resulting economic pain would be significant. Economic modeling by McKinsey suggests that by 2020, global GDP would be about $1.5 trillion smaller than expected, if oil prices spiked and stayed high for several years.
If crude-oil prices rose to $125 a barrel or above and stayed there long enough global growth would undoubtedly suffer. McKinsey estimates that this type of shock would drive down global growth by 0.6 to 0.9 % in the first year (Fig. 2).



The modeling suggests that the country-level impact of spiking oil prices would be quite uneven - and not just because of differences in the energy efficiency of various economies. Even more important are variations in the relative size of the industrial sector in different countries. Export-oriented advanced manufacturing economies, such as Germany and Japan, are more vulnerable than their relative energy efficiency might indicate.McKinsey also describes energy-efficient supply chain strategies that some companies are already undertaking (Fig. 3).



Building a supply chain that can withstand high oil prices would still make economic sense even if oil prices were as low as $40 a barrel. The potential would be even greater at higher prices. Research conducted by McKinsey three years ago, when oil prices shot up to $125 and beyond, indicated that a variety of actions would collectively reduce the energy intensity of global supply chains by almost one-fourth, and energy intensity could be reduced by more than one-third if oil prices stayed above $100 a barrel for a prolonged period.
Projections suggest that in a "business as usual" scenario - assumed that between 2010 and 2020 the world economy will grow at 3.0 to 3.5 %, a rate currently anticipated by many analysts and that oil prices won't significantly exceed $100 a barrel during this period - the world could reach a realistic supply capacity of around 100 million barrels a day by 2020, up from about 92 million today. Conservation measures could reduce oil demand by 10 million to 20 million barrels a day (Fig. 4).



Reduction measures may be immediate or structural. In the long run, structural changes could well be a positive development for the world - resulting in more predictable and sustainable energy supplies and prices. But navigating the transition would be challenging and would reward the well prepared. The time is now for companies to start planning for the possibility of another price shock and a powerful market response.