June 24, 2010
So there is plenty of oil and gas after all. Prices will tumble along gently until well into the next decade. We are becoming more
efficient in our use of energy, with 3pc extra savings annually. That is a faster pace than the rising real cost of fuel. Mankind will not run out of fuel for a very long time.
That at least is the story today from the International Energy Agency. Their medium-term outlook for fossil fuel markets is a dazzling contrast with last year’s warnings that a combination of break-neck industrialisation in China and lack of investment in new oil fields (thanks to the credit freeze) would exhaust global spare capacity by 2013.
The IEA said then that we would need “four new Saudi Arabias” within a generation to cope with the rise of China, and there were no such Saudi Arabias in sight. Such are the perils of forecasting the volatile variables of supply and demand for oil.
What has changed – apart from human emotions? For starters, the global gas market has been undergoing a revolution as a result of a) liquefied natural gas, a technology that is only just coming into its own and allows countries such as Qatar to ship their once useless reserves of gas on frozen hulls across the world; LNG output will increase by 50pc from 2008 to 2013. Actually, this is not that new, but never mind.
b) advances in US gas extraction from rock, which have turned the US into the world’s biggest producer of gas. Europe is jumping on the bandwagon. “The development of unconventional gas in North America is of global significance,” said the agency. Indeed it is. The knock-on effects run right through the energy complex.
The IEA now expects spare capacity of oil to remain at a comfortable 3.5m barrels a day (bpd) in 2015, with consumption edging up by an extra 1m bpd each year to around 90m bpd (or 92m if global growth is stronger). All this is quite manageable. It talked of a “gentle nominal price escalation through mid-decade, with prices rising from $77 to $86″.
The alarmist stories we heard last year from certain City banks about collapsing supply (I will spare the names) were wildly wrong. The IEA’s upward revisions from 2009 come from the US, Russia, Colombia, Canada, Mexico, Norway, Egypt, and even the UK (+80,000).
Supply is rising from off-shore Brazil, the Caspian, Canadian oil sands, and biofuels, offsetting declines in the North Sea. Non-OPEC output will actually grow from 51.5m (bpd) to 52.5m by 2015. No crisis there … Latin America will jump from 3.9m to 5.1m, the old Soviet bloc from 13.3m to 13.8m.
On the demand side, America’s gasoline use is slowly “evaporating”. Consumption is falling by 0.6pc a year. This will continue after the new standard of 35.5 miles per gallon for light vehicles that came into force in April. Battery technologies for electric vehicles are on the cusp of a break-through, so long as lithium does not run short, (Half the world’s reserves are in Bolivia). Japanese researchers have built an 8-wheel prototype with a motor in each wheel that massively extends battery life because less energy is lost. “The transportation game-changer is just beginning,” said the IEA.
There are “demand risks”. Large parts of Asia, Latin America, and the Mid-East are at cusp of the “critical oil demand ‘take-off’ zone of $3,000 to $4,000 per capita income” when use explodes – ie, when they move from bicycles to scooters to cars, and install air-conditioning. Demand from emerging economies will make up 52pc of total global consumption by 2015. ( The rich countries have already hit the “S Curve” of saturation, followed by a long slow slide).
I am not an oil expert, just a curious spectator like many readers. I keep an eye on energy markets because they are a window into the global economy and the world’s strategic system.
I pass on the report without taking any particular view, and would be interested in your thoughts. My own suspicion is that Peak Oil has not been conjured away quite so easily as the IEA suggests, especially after BP’s debacle in the Gulf of Mexico.
At the very least, the marginal cost and risk cost of deep-sea drilling has rocketed. This must affect projects off Brazil, Angola, the Norwegian Arctic, and up in Russia’s `High North’. If the spill keeps gushing into the Autumn it may do to sea drilling, what Three Mile Island did to the US nuclear industry for thirty years.
Jeremy Leggett from Solarcentury and a member of the UK’s Task Force on Peak Oil argues that Big Oil has systemically overstated reserves for years to inflate share prices, shielded by captive regulators. Their deception compares to the systemic errors of the banks in the credit crunch, but ultimately on a bigger scale and with potentially more nefaste consequences.
I reserve my judgement on this. The energy market is infuriatingly opaque. But on balance, I think IEA was closer to the truth last year.