IEA Forecasts Sustained Energy Growth, But No "Era of Oil Abundance"

• The IEA's latest long-term forecasts highlights the growth of unconventional oil and gas, especially in North America, but does not see this leading to much lower oil prices.
• In their main scenario fossil fuels will still meet more than three-fourths of the world's energy needs by 2035, despite significant growth in renewable energy.

The International Energy Agency (IEA) released its latest World Energy Outlook (WEO) in November, looking twenty-plus years into our energy future. The trends it describes add nuance and detail to last year's projections, rather than upending them.  Among other things they advance the expected date of global oil production leadership by the US to 2015 but suggest these gains may be short-lived and will not lead to "cheap oil."  The IEA also envisions a reshuffling of the traditional roles of energy importing, exporting and consuming countries, against a backdrop of steadily increasing energy-related greenhouse gas emissions.

As in previous years, the new WEO examines the full range of energy supply and demand, with a focus this time on the sources and uses of petroleum, and the emergence of Brazil as an oil and energy power. While recognizing that they might be underestimating the potential for technology or additional resource discoveries to sustain the growth of "light tight oil", or shale oil, which together with oil sands and gas liquids is a primary driver of oil supply growth today, the IEA forecasts it would peak by 2025.

That puts the burden for supporting oil demand growth and the replacement of supplies lost to natural decline after 2025 back onto the Middle East producers. So in the IEA's view, OPEC's loss of market power appears temporary. A corollary to this is that the agency does not anticipate a sustained drop in oil prices, but rather a gradual increase of about 16% by 2035. That's because the unconventional oil helping to drive current market shifts is still relatively high-cost, compared to the large conventional oil resources of the Middle East.

Although the IEA expects the global oil market to grow from its present level of around 90 million barrels per day (MBD) to 101 MBD in 2035, that change would be less than their forecasted equivalent global growth in gas, renewables or even coal. The concentration of oil demand in transport and petrochemicals would also increase, while other uses contract slightly. This is consistent with last year's observation that the center of the oil market is shifting towards Asia, since around one-third of the total anticipated growth in oil demand is for diesel to fuel goods deliveries in Asia.

The shift toward Asia applies to other forms of energy, as well, including natural gas and the expanded use of renewable energy.  This trend is already altering global energy trading patterns, and with the US becoming more energy self-sufficient  the IEA sees a new role for energy exports from Canada to supply Asia. That  includes both LNG and oil sands, which Fatih Birol, the IEA's chief economist, recently indicated the agency sees as only a minor, incremental threat to the climate compared to growing coal use.

An added nuance in this year's outlook is that the IEA now expects world-leading energy growth in China to be overtaken in a decade or so by faster growth in India, while rapidly growing consumption in the Middle East could result in that region posting the  second-highest growth in primary energy demand through 2035, especially for natural gas.

In the launch presentation in London Dr. Birol assessed the consequences of strong North American energy growth and shifting exports and imports for the prices that industries pay for energy. Because any exports of low-cost North American shale gas must be priced to cover the cost of liquefaction and long-haul freight, plus a margin, global natural gas prices should converge somewhat but still not equalize among the major consuming regions. As a result, the IEA expects US-based energy-intensive industries to have a persistent cost advantage in both gas and electricity, enabling them to increase their share of global markets. That has implications for employment and economic growth, while sustained energy price disparities should also drive energy efficiency improvements in response.

Another issue that received prominent attention at the launch was the always controversial matter of subsidies, for both conventional and renewable energy. The IEA estimated global fossil fuel subsidies at $544 billion 2012--mainly in developing countries and Middle East oil producers--resulting in "wasteful consumption" and fewer benefits for the poor than commonly claimed. And while supporting the use of subsidies to promote greater use of renewable energy, the agency's Executive Director, Maria van der Hoeven, made a particular point about the necessity for such subsidies to be carefully targeted and very responsive to changes in technology cost.

The IEA was founded in the aftermath of the 1973-74 Arab Oil Embargo and will celebrate its 40th anniversary next year. I couldn't help thinking about that as I reviewed the updated WTO materials. They're interesting as an annual update, but also in reflecting how the world of energy has changed since the oil shocks of the 1970s.

The rapid development of unconventional oil and gas that underpins the IEA's latest forecast would likely have amazed the industry veterans I met at the start of my career, but still fit within their worldview. I think they would have found the projected growth of renewable energy, supported by climate-change-inspired subsidies that surpassed $100 billion per year in 2012 more futuristic and surprising. Yet despite the anticipated expansion of renewable energy sources over the next 22 years, the IEA envisions the share of fossil fuels in the world's total energy supply only falling from 82% today to 76% in its main "New Policies" scenario.  That will seem overly cautious to many, but it underlines the challenges involved in changing such massive systems.

I'd like to wish my readers all the joys of the holiday season and a happy and prosperous New Year.

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.

How Falling Oil Imports Doubled the US Strategic Petroleum Reserve

• Falling oil imports have greatly expanded the capability of the US Strategic Petroleum Reserve to replace oil imports in a crisis, although prices would still rise.

• The SPR remains an imperfect backstop. Post-Syria, it is high time for Congress and the White House to address its gaps after four decades of change.

Last week's deal between the US and Russia defused the threat of an attack on Syria's military installations, along with the risks of unintended consequences for Mideast oil exports. However, we shouldn't lose sight of an important energy-related observation in the Wall St. Journal's “Heard on the Street” column as the crisis was peaking. It concerned the extraordinary degree to which reviving US oil production and weaker US energy demand have boosted the effectiveness of US oil inventories, including the US Strategic Petroleum Reserve (SPR).

Without adding a drop — the SPR actually shrank a bit in 2011 — the reserve’s potential to replace daily oil imports in a crisis has soared as those imports have declined. This could prove extremely helpful should the complex talks over securing Syria's chemical weapons break down, and the US and France proceed with missile or air strikes. Longer term, it serves as a further reminder that the existing SPR was designed for another era and is overdue for a major rethink.

Having 700 million barrels of oil available in federal facilities along the Gulf Coast has tempted presidents and other politicians, who saw opportunities to benefit from using it to attempt to crush periodic gasoline price spikes. However, the recent situation came much closer to the scenarios the SPR was intended to address when it was begun during the Ford administration, to provide a backstop for our vital energy supplies in emergencies involving the physical interruption of supply. When it comes to uses of the SPR, I’ve always been a purist, perhaps because I can recall sitting in gas lines and participating involuntarily in the bizarre “odd-even” rationing-by-license-plate scheme introduced during the oil crisis following the Iranian Revolution in 1979.

Here’s how the benefits of tapping the SPR in an actual crisis have improved, based on the rapid recent drop in US oil imports. In 2007, the SPR could have replaced just over half of our crude oil imports from countries other than Canada or Mexico for 165 days, at its maximum draw-down rate of 4.25 million barrels per day. With its current inventory and this year’s average crude oil imports through June running at around 7.6 million barrels per day, the SPR could substitute for 100% of our non-North American imports for 163 days. The value of such an insurance policy is rarely appreciated until it is needed.

Of course in practice the situation would be more complicated, mainly for reasons that support the case for rethinking the current 1970s-vintage reserve. One problem is that the oil stored in caverns near the Gulf of Mexico wouldn’t provide much immediate assistance for east coast refineries or for the West Coast, which has become increasingly dependent on imports as production in both Alaska and California declined steadily. Then there’s the issue of quality. Nearly 40% of the SPR oil is light and sweet (low in sulfur), while much of the oil we still import is heavy and sour (higher sulfur), to match the requirements of current refinery configurations. With production of light sweet crude in Texas and North Dakota booming, releasing sweet crude from the SPR could compound regional imbalances and possibly result in reduced refinery utilization. Any redesign of the SPR should take these important shifts into account.

Oil prices jumped just at the thought of a cruise missile attack on Syria, so it’s worth recalling what a back-up supply from the SPR can and can’t do. It can buffer the US economy from the impact of a serious interruption in the flow of crude oil cargoes from the Middle East or elsewhere, for some months. US refineries would continue to operate, as would the planes, trains, trucks and ships they fuel, and on which commerce depends. However, consumers wouldn’t be insulated from the price increases that would accompany any major disruption in Middle East oil exports, because the SPR oil must be auctioned to refiners at market prices. The resulting situation at gas stations might look a lot like price-gouging, with social media rapidly spreading outrage and conspiracy theories. The fallout from that could be disruptive, too, if somewhat less so than widespread fuel shortages and “out of gas” signs.

A different version of this posting was previously published on Energy Trends Insider.