The International Energy Agency (IEA) is forecasting world oil demand will set a new record next year when is smashes through 2008’s pre-recession high – and warning that the “era of cheap oil is over.”
According to the IEA’s latest Oil Market Report, published August 11, global demand will reach 86.6 million barrels per day in 2010, and then 87.9 million barrels per day in 2011, assuming a continuing global economic recovery. This means demand is set to pass the all-time high of 86.9 million barrels per day established in 2008 before the global economic downturn.
The figure has been given significance by those that say oil peaked midway through 2008. Peak oil refers to the time of maximum production – the high point of the oil output bell chart, after which, as geologist M King Hubbert showed, output will diminish even though much oil remains to be extracted. If oil did peak at 86.9 million barrels per day, then demand would be expected to overtake supply early in 2011. (Personally, I don’t believe oil has peaked – but this will soon be put to the test.)
Another significant figure bandied around relates to oil’s mid-2008 price spike: it traded at $147 a barrel in July of that year. People that believe oil peaked will tell you this was a simple matter of supply and demand, while Opec has all along blamed speculators for pushing the prices up. Another factor, as reported at the time by Reuters, was the then tension between Israel, the US and Iran, including Iranian missile tests and rumoured Israeli air force drills in Iranian airspace that “left the oil markets worried about a potential supply disruption.”
There were clearly many market forces pushing oil prices up at the time – so, unlike more accomplished peak oil writers, I don’t see oil’s passage through the 86.9 million-barrels-per-day threshold as guaranteeing triple digit figures. Anything is possible, of course, but to my mind the key figure to watch is Opec’s spare capacity. This is the amount of mothballed production that can quickly come online to cushion against oil supply and demand shocks. Periods of tight capacity are associated with high oil prices; zero capacity indicates peak oil, or at least supply failing to keep up with demand.
Bloomberg reported that Opec’s “spare capacity was as low as about 2 million barrels a day in July 2008, when oil prices peaked.” Opec, which supplies 40 per cent of the world’s oil, currently claims a 6.6-million-barrel-a-day spare capacity, but this figure has been questioned. A June IEA report predicts this falling to 3.6 million barrels per day by 2015. Markets get jumpy around that point.
It’s perhaps with this in mind that the IEA’s chief economist Fatih Birol (pictured, right) has been repeating the phrase the era of cheap oil is over at numerous interviews recently. He told German TV on August 10 that:
“The era of cheap oil is over. Each barrel oil that will come to market in the future will be much more difficult to produce and therefore more expensive. We all - governments, industry and consumers - should carefully choose the type of car we want to buy in the future and should be prepared for oil prices being much higher than several years ago.”
Three months previously Birol told the annual forum of the Organization for Economic Co-operation and Development in Paris that this is indeed the end of an era:
Birol said that oil production in non-Organization of Petroleum Exporting Countries is reaching a peak and the bulk of oil predication growth will have to come from a few countries in the Middle East.
If there is a lack of investment in production and a stronger-than-expected economic recovery in such oil demand centers as China, India and the Middle East, prices will rise significantly, Birol said.
"If these two marry in two years' time--strong real demand growth and lack of investment in production--in 2013, 2014 we may well see higher prices than we have seen in the recent past," he said.
Back in August 2009, he told the Independent newspaper:
“The market power of the very few oil-producing countries, mainly in the Middle East, will increase very quickly. They already have about 40 per cent share of the oil market and this will increase much more strongly in the future," he said.
"If we see a tightness of the markets, people in the street will see it in terms of higher prices, much higher than we see now. It will have an impact on the economy, definitely, especially if we see this tightness in the markets in the next few years," Dr Birol said.
The interview, Warning: Oil supplies are running out fast, reports that the world’s biggest oil fields have already peaked and are declining faster than previously thought, as has non-Opec oil. In addition, the indusry as a whole suffers from under-investment, which will lead to an “oil crunch” in five years’ time that. The item states:
In its first-ever assessment of the world's major oil fields, the IEA concluded that the global energy system was at a crossroads and that consumption of oil was “patently unsustainable,” with expected demand far outstripping supply.
Oil production has already peaked in non-Opec countries and the era of cheap oil has come to an end, it warned.
In most fields, oil production has now peaked, which means that other sources of supply have to be found to meet existing demand.
Even if demand remained steady, the world would have to find the equivalent of four Saudi Arabias to maintain production, and six Saudi Arabias if it is to keep up with the expected increase in demand between now and 2030, Dr Birol said.
It’s interesting to note that the above is contradicted by Opec, which published its global oil demand forecast on August 13. This, the Monthly Oil Market Report, August 2010, states that coming “oil demand growth will remain moderate” because of uncertainties about the pace of recovery. Demand will be driven by China, India, the Middle East and Latin America.
Opec states global demand for oil works out at 85.5 million barrels a day throughout 2010 (from 85.01 in the first quarter to 86.62 million barrels a day at year’s end). This will rise to 86.56 million barrels a day in 2011 (dipping in the first half of the year to 85.49, then rising in the second half to 87.71 in the final quarter).
Not only is Opec’s estimate for 2011 oil consumption around one million barrels a day lower than that of the IEA (86.56 versus 87.9 million barrels per day, respectively), but the Monthly Oil Market Report also sees increased output from Non-Opec countries:
Non-OPEC supply in 2010 is expected to increase by 0.8 mb/d, following an upward revision mainly due to higher-than-expected supply from the US, Russia and China as well as some historical adjustments. In 2011, non-OPEC oil supply is forecast to grow by 0.3 mb/d, supported by projected increases in Brazil, Canada, Azerbaijan, Colombia, and Kazakhstan.
To contrast, the IEA is stating that just the delays on deepwater projects following BP’s Gulf of Mexico disaster will dampen non-Opec output. According to the Daily Mail:
Fatih Birol, Chief Economist of the International Energy Agency, said 90% of non-OPEC oil production growth was expected to come from offshore drilling over the next decade, but this growth is now under threat in the four leading basins: the Gulf, the North Sea, Brazil and Africa.
The IEA says global oil output may suffer a 500,000-barrels-a-day hit by 2015 because of the White House ban alone.
If things continue to move in the wrong direction, the world will become increasingly reliant on state-owned oil companies from the Middle East and Russia, he argued. ‘That will have implications for the oil industry, oil markets, and oil prices.’
Clearly, the era of cheap oil is gone – although market volatility may well bring episodic price collapses. It seems safe to assume that demand for oil will continue to grow all the time the world can stave off ecomonic collapse; and that the output of Non-opec countries cannot itself be increased fast enough to meet this rising demand (it may even have peaked and be set to diminish, as the IEA suggest). Deepwater and oil sands cannot be relied on to pick up the slack, despite the media hoopla. Either way, Opec is becoming more and more central to our way of life. More to the point, Opec’s spare capacity is of prime importance. If this begins to dwindle by 2013, as the IEA suggests – which Opec denies – then expect a period of extreme market volatility, soaring prices and, most likely, a marked downturn in the rather fragile global economic recovery.