No. 2026-10-A - Policy Discussion Paper: Management and Analysis of Disorderly Climate Transitions - Disorderly transitions in global oil markets

Abstract:

The war in Iran in 2026 has highlighted the sensitivity of oil markets and the global economy to geopolitical shocks. These shocks overlap with the ongoing, climate related, energy transition as these shocks lead to further unpredictability and disorder of the transition, while the transition could have profound implications for global macroeconomic sensitivity to the geopolitical shocks. 

A disorderly energy transition for global oil markets - where oil demand and supply become unbalanced during the transition - could have profound implications on energy prices, oil price volatility, economic growth, and macroeconomic stability. A transition can either moderate or contribute to a market imbalance when technology development and deployment proceeds faster or slower than anticipated, when policy changes market dynamics, or by affecting the response of the market to geopolitical shocks. Furthermore, both consumers and producers will be affected by the risk and uncertainty generated by a disorderly transition. Their actions could, potentially, amplify the uncertainty and volatility if transition disorder is left unmanaged.

Within that context this paper describes detailed modelling of global oil supply, demand, and oil market forces - including economic analysis at the oil field level and for demand subsegments and key transition technologies – that has been adapted to simulate geopolitical shocks, transition uncertainties, policy development, and interactions between the three. The models provide projections of oil price expectations and probability distributions for oil prices by year through 2054 that can be used to develop and manage hedges, reserves, investment strategies, and policy actions. The model also provides projections of oil price volatility over time as a function of progress of a transition.   

Six key findings from the analysis:

1. Demand for oil is almost certain to decline significantly. The extent of the decline will be determined by the pace of technology development and by policy.
2. The combination of transition uncertainties and the threat of geopolitical shocks could cause oil producers to alter their production portfolios significantly.
3. Over the next 10-15 years, enough of a transition is locked-in to decrease expected price volatility and sensitivity to potential geopolitical shocks, despite transition uncertainty and changing production portfolios. An accelerated transition would decrease volatility and sensitivity further.
4. Future oil prices will be highly dependent on the outcomes of technology development, policy, and geopolitical shocks, with a wide range of price levels possible.
5. Median prices are heavily influenced by the speed of the transition, with faster transitions leading to lower prices, although producer responses set an effective floor to prices.
6. Simulation modelling of global oil markets could facilitate developing tools to manage uncertainty and risk.

This analysis is part of a wider body of work exploring the financial risk for countries, companies and investors of changes to the global economy associated with mitigating climate change.