IEA Warns That Pricier Oil is In Your Future

Yves here. In case you harbored any doubts, the International Energy Agency (IEA), feels compelled to remind the consuming public that our current bout of cheap oil prices won’t be with us for all that long.

By Nick Cunningham, a Washington DC-based writer on energy and environmental issues. You can follow him on twitter at @nickcunningham1. Originally published at OilPrice

Despite what appears to be a saturated oil market in 2014, oil producers around the world will struggle to meet rising demand over the next few decades.

In its latest annual World Energy Outlook, the International Energy Agency (IEA) warned that the current period of oil abundance may be fleeting, and in fact, without heroic levels of production increases, oil markets will grow dangerously tight in the coming years.

Global oil demand is expected to increase by 37 percent by 2040, with a dominant proportion of that coming from developing countries – i.e. China and India. In fact, the IEA says that for every barrel of oil the industrialized world expects to eliminate from demand through efficiency or other ways of reducing demand, developing countries will burn through two additional barrels.

The IEA predicts that the world will need to extract an additional 14 million barrels of oil per day (bpd) by 2040, which comes on top of today’s production levels of about 90 million bpd. While there is a lot of triumphalism in the United States about shale oil production and how places like the Bakken and the Eagle Ford have ushered in an era of abundance, the IEA says that tight oil production in the U.S. – along with Canadian oil sands – will only last until the mid-2020’s.

After that point, when the shale revolution peters out, oil markets revert to their old ways – that is, looking to the Middle East once again to meet global demand. And that should raise some alarm. Saudi Arabia will remain one of the largest and most important oil producers in the world, but it probably won’t be able to ramp up production much beyond its current levels. There is some slack production in Iran, due to western sanctions, but even when it returns to the fold it likely will only make a small contribution to oil production growth in the long-term.

Instead, much of the world’s hopes are pinned disproportionately on Iraq. A year ago, after the IEA released its 2013 WEO, I wrote about how the IEA was placing a surprising amount of faith in the ability of Iraq to scale up its oil production. For several years, the IEA predicted that Iraq would be able to triple its output from 3 million bpd to around 8.3 million bpd by 2035. Under that assumption, oil prices would rise only a modest amount over that timeframe.

That would have been a monumental task even before the country began unraveling in June 2014. Since then, Iraq has been plunged back into a state of war. The prospect that it can be put back together, and the requisite levels of capital investment can be put into its oil sector in order to add 5-6 million bpd over the next 20-30 years, appears fanciful to say the least.

An estimated $900 billion will need to be deployed each year beginning in the 2030s to bring enough oil online to meet global demand. But the IEA also cautions that replicating the tight oil boom in the United States will be very difficult. Different geological conditions could pose some problems, but the long lead times and opposition to drilling will also slow development in much of the world.

Unlike last year, this time around the IEA appears to be more concerned. “A well-supplied oil market in the short-term should not disguise the challenges that lie ahead, as the world is set to rely more heavily on a relatively small number of producing countries,” the IEA Chief Economist Fatih Birol, said in a press release. And in its WEO Fact sheet, the IEA declares “the task of bringing production above 100 mb/d rests on a fairly limited number of shoulders.”

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  1. Illort

    I’m connected to the business, and this doesn’t surprise me.
    Price will go back up, sooner or later. Longer it stays below 100$, the higher it will rocket later, but I doubt it will stay this cheap for long. Must be noted that 6 months is very short time in the industry, as the future production is developed on long term demand projections.

  2. Paul Tioxon

    Venezuela has the largest proven oil reserves in the world. OPEC controls 81% of the proven reserves, and Venezuela was the founding member of OPEC, due to WWII post war world order, which place the Middle East at the center of oil development and left them out of the biggest economic boom in history. It is almost never mentioned in this regard and is seems to be permanently relegated to some sort of oddball nation run by a charismatic military mad man in the news. The bitter middle class clashes with the government because their standard of living has been stymied by the redistribution of wealth from the oil to the poorest of the poor first. This story is almost never carefully explained that while there is strong anti-Chavez sentiment, the people protesting are hardly in the same category as savaged brutalized campasinos of Latin America. These are people who are pissed off that they are not getting enough because the government is forcing the issue of sharing the wealth. It would seem that someday, Venezuela’s oil industry will be modernized and the wealth that it has will be realized. But the fact that it is under firm government control with so many of the populace prepared to defend keeping it that way holds they typical development model of major producers at bay until the usual terms of exploitation for the 1% can be installed.

    In the meantime, the China/US energy pact is just getting some analysis. Basically, the Chinese are agreeing to produce enough sustainable energy production within 15 years equal to the entire energy output of the USA. Certainly if they can do it, we can, with much better results for jobs, clean air and water and national security. While this may not dramatically change the IEA forecast for oil, it would seem that transferring to energy sources other than oil would be a good way to keep an energy hog of a nation such as ours from going broke paying for oil. As to the rest of the world, if China and the US are doing so, there could be a dramatic shift in this forecast. The status quo will keep these garden variety predictions accurate and going down the path of this new pact may alter things as far as it alters the status quo.

    1. Yves Smith Post author

      Venezuela’s reserves are heavy sour crude and thus not as useful in energy terms as light sweet crude.

      Plus every credible source I have seen says Iraq has the second largest proven reserves after Saudi Arabia, and Saudi Arabia had LONG been able to act as the swing producer and move prices. Venezuela has NEVER been able to play that role. I’d be skeptical of a source that says otherwise.

      When OPEC is restricting production, it’s based on the country’s self-reported proven reserves, I believe (as in their permitted production level is based on that). I recall reading (and it might even be in my archives, but I really need to turn in) that you can look at OPEC members’ claims re proven reserves and see implausible year-to-year increases, as in there were no new finds or reasons to see such big jumps. The peak oil types like Matthew Simmons used that to argue that official proven reserves were greatly inflated. So that may account for Venezuela reporting implausibly large reserves.

  3. Luke The Debtor

    My generic oil-rant:

    While most pundits and folks claim Saudi Arabia controls OPEC and has the biggest influence in the oil markets, it is in fact the US who has the biggest influence in the oil markets. The president has taken steps to withhold 600,000 bpd of Canadian production by barring the approval of the Keystone XL pipeline.

    This action may delay even more production since there are other planned pipelines (perhaps preventing Canada from doubling production by 2030). Also, sanctions against Iran have probably lowered Iran’s production by 700,000 bpd. The US is also seeking similar sanctions against Russia. The US could add over 1,000,000 bpd within about a year by approving XL and eliminating sanctions.

    The US is the top 3 oil producer with the most production growth over the past 5 years. However, it is also the largest oil consumer. Changes in consumption patterns will also affect oil markets (fewer SUVs, living closer to work, etc). So, it is not surprising that the US media (liberal or conservative) always turns to some country in the ME as a scapegoat for high oil prices.

    1. Yves Smith Post author

      1. Oil prices are not high by inflation-adjusted standards

      2. Oil prices dropped below $80 because the Saudis said they wouldn’t support higher prices. So how exactly are we or people in general blaming the Saudis for “high” oil prices?

      3. The Saudis as the global swing producer, influence OPEC’s posture, so their power is even greater than their raw production levels

  4. Another Gordon

    Predictions based on extrapolating trends to 2040 are completely meaningless; a lot of smart people see the opportunity to knock oil off its perch in transportation fuels long before then.

    For instance OXIS Energy is just one of many companies developing lithium-sulphur batteries as the next generation replacement for the not-good-enough Li-ion currently used in battery electric vehicles (BEVs). They’re not quite there yet but appear credible and should have a battery that will be a no-brainer for some (but not all) transport uses – local delivery vans, commuter cars etc. by around 2020, perhaps even earlier. Later battery innovations, currently at the basic research stage, will extend and deepen the transport sectors lost to oil which will likely extend to almost all transport fuels well before 2040. Oil will then be reduced to niche applications – potentially supplied mainly by biocrudes.

    Even a modest transport market penetration by BEVs will destroy the demand growth seen by the IEA; higher BEV adoption will send oil prices into a steep decline. Goodness knows how that will play out in price terms but the energy independence, lower pollution in cities and balance of payments advantages are such that governments (except for oil exporters!) will continue to back battery technologies.

    My guess is that batteries are set to become the great granddaddy of disruptive innovations with profound implications for renewable energy (good ones because they provides a variable and interruptible load that would dovetail perfectly with renewables’ unpredictable output).

    1. Jef

      Those claims are just that…claims but lets say it is so.

      Most optimistic claims for the future such as BEVs, renewable energy, basically all of the new technology kicking in to ring in a new world all rely on a future where everyone is steadily becoming more wealthy, making more money, assets increasing in value, etc.

      The reality in the here and now is just the opposite. Can anyone here posit a plausible scenario where this trend reverses?

      One thing is certain… the future is going to be ever more expensive and the money is concentrating in fewer and fewer hands.

      1. Another Gordon

        Jef – They are indeed just “claims” at present and timing could easily be off but … There are multiple battery technologies, multiple companies and multiple backers – both private and governmental. The result is evolution; it doesn’t depend on any one thing working out because there is always an alternative – and an alternative to that alternative and so on.

        And they don’t rely on any particular future path for the economy. Even if it gets so bad for ordinary people that a revolution breaks out in one country other countries will carry on with the research. I grant it’s perfectly possible that big oil in, say, the US will stymie progress fearing the creative destruction that is its counterpart. But that isn’t going to be the case everywhere. Europe and China are both far more vulnerable on energy than the US and they know it.

        1. James

          I think his point is, and it’s a good one, is that even if all that tree-huggery technology comes to pass, it still has to find its way into the hands of the people that are going to use it for us all to benefit. So there’s that, which is a pretty big hurdle by itself. But in addition, all of the current dirty technology they’re using now must be gotten rid of, which for most of us means sold to someone else if it’s not already ready for scrap, who presumably will be using it thereafter as well. So the sum total of all that is people with questionable and likely falling incomes scrapping or selling their current well-developed albeit dirty internal combustion engine technologies, probably for a loss, to buy new still developing technologies at a premium, in an economy that’s stagnant at best, even allowing for any prospective job creation all this still yet to be proven technology might create. Even if you’re optimistic, and I’m certainly not, you have to acknowledge that those are some very significant hurdles.

  5. Dino Reno

    IEA and Oil Price are talking their book and soiling their undergarments at the same time while the price picture decays and demand drys up. Still nice to know that someone can predict what’s going to happen 25 years from now.
    Meanwhile, disruptive technologies will continue to chip away at oil demand that even the IEA predicts will only grow at between .9% and .3% per in the future. I’d say that’s a very thin margin of error to keep the dream alive. And no where in the report do I see a specific prediction of higher prices, although that may be implied by a prediction of fewer producers and a prediction of a very small increase in demand. The reality is the current trend points down for prices and demand from here on out.

    1. Illort

      I agree the demand Growth will flatten, but I have hard time seeing absolute worldwide demand to begin decreasing in next 25 years in the future. Besides, even if absolute demand would begin to fall, this doesn’t necessarily mean simultaneous fall in prices. Projected fall in demand would lead to phasing out of producing wells, decreasing output to correlate better with demand. Wells past their peak production also see their cost per barrel to increase gradually, so lack of development of new wells would also cause prices to increase or output to drop which leads to increase in price.

      1. susan the other

        I’m skeptical that the uses of oil will remain the same and thus I doubt the price will go too high. Especially the way the year 2030 is being thrown around. There is probably enuf natgas to see the world thru to that date and then oil will not be used for fuel. Only as a chemical commodity which is invaluable for the plastics industry among others. Which also makes sense of the shale industry which otherwise seems so very frivolous. Shale might have a modest future.

        1. Dino Reno

          I agree that oil is too valuable to burn for transportation. At some point, the less it’s used, the more expensive it may become. Think of what a barrel of whale oil would cost you today–if you could get it, and that’s a big if, thankfully.

  6. Minor Heretic

    What interests me is Steven Koptiz’s concept of the carrying price of oil. There is a threshold point in the price elasticity of oil where conservation, efficiency measures, and fuel switching (to renewable energy) ramp up sharply. Kopitz estimates that the carrying price for oil in the U.S. is $110 a barrel. For China it is around $120. The more energy efficient the country (or industry) the higher the carrying price.

    The price will undoubtedly slingshot past $110, but if Kopitz is right, that’s where the behavioral adjustment kicks in. It makes sense that there is a limit. Even if he is wrong about the exact number, I would bet that there is an inflection point. We might never see sustained $150/bbl oil.

    Kopitz also pointed out that 4 of the last 5 recessions started just after oil expenditures rose to 4% of GDP. It’s a drag, man.

    I remember a student of mine who worked in a service department at a dealership specializing in high end SUVs. Back when oil spiked to $140 they had a rash of people pretending that their SUVs had been stolen, vandalizing the vehicles themselves, and trying to collect the insurance. They couldn’t afford to put gas in the behemoths and were underwater on their auto loans. We will probably see that again. I heard that the lemmings are flooding the dealerships again and buying wheeled dirigibles.

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