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Countdown to $100 oil (42) - IEA predicts shortages within 5 years

by Jerome a Paris Mon Jul 9th, 2007 at 10:01:13 AM EST

Oil has been above 70$/bl for the past 3 months, but this is no longer news as it is below the "highest ever". And yet, this comes at a time with no obvious geopolitical crisis (Iranian rumblings are in fact rather more tuned down these days), with some problems in Nigeria, but barely more than has been the norm lately...


IEA warns of global oil shortage

The world economy faces a tight oil market in the next five years on a combination of accelerating consumption and output falls in mature areas, such as the North Sea, and long delays in new production projects.

The warning on Monday by the International Energy Agency, the energy watchdog, comes as oil prices surge above $76 a barrel, to $2.50 a barrel below last summer's all-time high of $78.65.


The prognosis is based on the expected two items I've been discussin ad nauseam in my diaries: relentless demand growth, and tightening supplies:


The IEA said in its Medium Term Oil Market Repot that "oil looks extremely tight in five years time" and there are "prospects of even tighter natural gas markets at the turn of the decade".

The IEA forecast that demand will grow at an annual rate of 1.9 per cent during the next five years, to reach 95.8m barrels a day in 2012. China and other emerging countries will lead the increase in consumption.

That means close to 2mb/d more to be added each year. The production capacity of Saudi Arabia to be added in  5 years - as a net addition, i.e. the real production additions need to be higher to take into account decline in existing fields:


Non-Opec cumulative growth in the next five years would add 2.6m b/d of new net production capacity, down from the 4.6m b/d cumulative increase in the period 2000-07.

The IEA said the smaller increase was due to falling production in mature areas - especially in the North Sea - and long delays in new production projects in other areas.

UK production is set to decline from today's 1.7m b/d to just 1m b/d in 2012. That is below the official British's government forecast range of 1.1-1.6m b/d for 2012.

And, very inconveniently, production is declining in the most friendly places, those where Western oil majors have access.


International and national oil companies were not investing enough to compensate for those declines, the watchdog added.

"Substantially higher cash returns to shareholders stand in curious contrast to growing upstream supply tightness and essentially unchanged exploration and production effort," the report said.

I have noted many times that oil companies did not invest, giving their money back to shareholders (and effectively telling them that they have better things to do with their cash than investing it in oil exploration and production - despite the current prices).

That the IEA makes the same remark today, in such explicit terms, is a pretty stark indictment. The question is, an indictment of what? Of profiteering by oil companies, or of our unsustainable addiction to a depleting resource? The fact is, the IEA would rather blame the oil companies than admit that peak oil is neigh. Coming from the industry watchdog, this, in itself, is a notable item...

Oh, just a side note:


Biofuels would contribute to ease the supply crunch, although will still represent a small percentage of global supply. The IEA forecasts global biofuels output to double in five years to reach 1.75m b/d in 2012.

5 years of massive disruption to agricultural markets will provide enough fuel to cover the increase over one year. If that's not an indictment of the uselessness - and sheer folly - of the biofuels boom, I don't know what it will take.

Earlier diaries in the series:
Countdown to $100 oil (41) - oil more expensive than it appears
Countdown to $100 oil (40) - Undulating plateau
Countdown to $100 oil (39) - BigOil running out of oil
Countdown to $100 oil (38) - Who gets Champagne edition
Countdown to $100 oil (37) - OPEC says peak oil (and $100 oil) is near
Countdown to $100 oil (36) - Free game! win champagne! no risk! (eurotrib)
Countdown to $100 oil (36) - Free game! win champagne! no risk! (DailyKos)
Countdown to $100 oil (35) - peak oil: the last skeptics capitulate (CERA)
Countdown to $100 oil (34) - Oil major CEO calls for demand reduction
Countdown to $100 oil (33) - Below zero
Countdown to $100 oil (32) - peak oil is, like, so over. Not!
Countdown to $100 oil (31) - $15 oil? The cornucopians are fighting back
Countdown to $100 oil (30) - senior politico fears looming oil wars
Countdown to $100 oil (29) - Alaska joins axis of evil (unreliable oil suppliers)
Countdown to $100 oil (28) - New records suggest more to come
Countdown to $100 oil (27) - 'Mission Accomplished' - High oil prices are here to stay
Countdown to $100 oil (26) - Time to bet again (eurotrib)
Countdown to $100 oil (26) - Time to bet again (dKos)
Countdown to $100 oil (25) - Iran vows that oil prices will not go down
Countdown to $100 oil (24) - What markets are telling us about future energy prices
Countdown to $100 oil (23) - Running out of natural gas in North America
Countdown to 100$ oil (22) - gas shortages in the UK - 240$/boe
Countdown to $100 oil (21A) - The 4 biggest oil fields in the world are in decline *
Countdown to 100$ oil (21bis) - long term vs short term worries (dKos)
Countdown to 100$ oil (21) - 8-page extravaganza in the Independent: 'we're doomed'
Countdown to 100$ oil (20) - Meteor Blades is Da Man in 2005
Countdown to 100$ oil (19) - Your bets for 2006 (Eurotrib)
Countdown to 100$ oil (19) - Your bets for 2006 (DailyKos)
Countdown to 100$ oil (18) - OPEC happy with oil above 50$
Countdown to 100$ oil (17) - Does it matter politically? A naked appeal for your support
Countdown to 100$ oil (16) - We'll know on Monday
Countdown to 100$ oil (15) - the impact on your electricity bill
Countdown to 100$ oil (14) - Greenspan acknoweldges peak oil
Countdown to 100$ oil (13) - Katrina strikes / refinery crisis
Countdown to 100$ oil (12) - Al-Qaeda, oil and Asian financial centers
Countdown to 100$ oil (11) - it's Greenspan's fault!
Countdown to 100$ oil (10) - Simmons says 300$ soon - and more
Countdown to 100$ oil (9) - I am taking bets (eurotrib)
Countdown to 100$ oil (9) - I am taking bets (dKos)
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1) (eurotrib)
Countdown to 100$ oil (1) (dKos)
* added to the series after the fact

Display:
http://www.dailykos.com/story/2007/7/9/9174/71464

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Jul 9th, 2007 at 10:02:01 AM EST

Oil prices supported by IEA forecasts

Brent crude oil futures on Monday eased slightly from their 11-month highs, hit last week, but forecasts of a global oil supply crunch ensured some support.

The International Energy Agency said on Monday that global oil demand would rise more quickly than previously forecast through to 2012, while supply would struggle to cope.

Despite the IEA's predictions oil prices fell slightly as investors took profits from last week's rise to an 11-month high.

By midday in London, Brent crude, having hit an 11-month high on Friday, fell 33 cents to $75.29 a barrel, while Nymex crude lost 49 cents to $72.32 a barrel.

Hey, $75 oil is NOT NEWS! You'll be surprised how quickly we shrug at $100 oil too...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Jul 9th, 2007 at 10:05:12 AM EST
By the way, with the inflation by May this year (latest data), WTI crude spot prices were just above $100-CPI-corrected in April and May 1980.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Jul 9th, 2007 at 10:39:37 AM EST
[ Parent ]
I swear that when we pass that record, someone will write that oil was still more expensive, corrected for inflation, back in 1862.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Jul 9th, 2007 at 11:13:17 AM EST
[ Parent ]
demand will [...] reach 95.8m barrels a day in 2012.

Right.

Problem is: where is supply gonna be?

The only way is see this happening is if everything goes smashing, all the reserves are the higher end of estimates, and Iraq starts producing bigtime.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Jul 9th, 2007 at 11:30:56 AM EST
[ Parent ]

Plus, in 1980, the peak was quite temporary.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Jul 9th, 2007 at 12:18:18 PM EST
[ Parent ]
I thought this contradicted the IEA's World Energy Outlook, but then I saw this in an earlier diary of yours.

Bush claiming 'Energy Independence' mantle already by Jerome a Paris on November 10th,  2006

The world is on a course that will lead it "from crisis to crisis" unless governments act immediately to save energy and invest in nuclear and biofuels, the International Energy Agency warned yesterday.

In an apocalyptic forecast, Claude Mandil, the agency's executive director, said that our current path "may mean skyrocketing prices or more frequent blackouts; can mean more supply disruptions, more meteorological catastrophes - or all these at the same time".

The IEA said the oilfields on which Europe and the US had come to depend to reduce their reliance on the Organisation of the Petroleum Exporting Countries would peak in the next five to seven years.

This is a quotation from the FT 8 months ago.

Can the last politician to go out the revolving door please turn the lights off?
by Migeru (migeru at eurotrib dot com) on Mon Jul 9th, 2007 at 10:18:02 AM EST
5 years of massive disruption to agricultural markets will provide enough fuel to cover the increase over one year. If that's not an indictment of the uselessness - and sheer folly - of the biofuels boom, I don't know what it will take.

Succinctly put.

By the way, I have found a remedy for the Cassandra-like angst produced by the fact that we know something awful is coming but no one is listening.

Oil investing. Prices go up, but instead of moaning, I just smile widely. I see Exxon, Total and Conoco are all upp 0,3-0,4 % today, while PetroChina is up almost 1,4 %. Maybe I'll add Chevron and Shell the next time prices go down.

Does this make me a bastard or just prudent? Or a prudent bastard?

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Jul 9th, 2007 at 11:08:39 AM EST
Oil will first go down next 12 months. It will eventually go up, but that will depend on how fast SA will collapse. It may take several years.

Why am I saying this ? We are about to enter a very sharp recession. Have you noticed that some big companies worldwide started issuing profit warning last week ? (Lexmark, Aker Yards, but also some in Paper, in Aluminum, strange in a time of record commodities price, huh ? not to mention home improvement & construction companies in the US an UK ...)

"demand on debt steroids" is about to shut off real quick when the rates go up.

And we now stand at one hedge fund bankruptcy every week (200 m$ caliber). TSHTF pretty soon.

http://www.romandie.com/infos/news2/200707061532000AWPCH.asp
http://www.latimes.com/business/investing/la-fi-wrap6.2jul06,1,3993332.story?coll=la-headlines-busin ess-invest

Pierre

by Pierre on Mon Jul 9th, 2007 at 11:50:29 AM EST
[ Parent ]
As far as I am informed, Aker Yards issued that profit warning not because they had run out of orders, their order book is swelling, but because they had muddled up their logistics system, or something like that.

A few weeks ago I wrote that I wouldn't worry about a recession until at least two of three things happened.

  1. Much higher oil price.

  2. Much higher interest rates.

  3. Total chaos in the US housing market (and the subprime mortages stuff).

Only no. 1 has of yet happened, so I'm sitting tight.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Jul 9th, 2007 at 11:55:51 AM EST
[ Parent ]
In my view, 3 has happened and is bleeding into the UK housing market (real "deep" UK, that is, not including the City of London).

And 2 is shaping quickly.

Pierre

by Pierre on Mon Jul 9th, 2007 at 12:02:11 PM EST
[ Parent ]
Speaking of no.3...
NEW YORK (CNNMoney.com) -- More than two million subprime adjustable rate mortgages (ARMs) are poised to reset at much higher rates in coming months, worsening an already suffering housing market.

[...]

"In October alone more than $50 billion in ARMs will reset," according to Mark Zandi, chief economist and co-founder of Moody's Economy.com. That's a record, according to Zandi.

[...]

As a result, Doug Duncan, chief economist for the Mortgage Bankers Association (MBA), is expecting as many as 600,000 home owners will get into trouble with perhaps half of them actually losing their homes.



Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Jul 9th, 2007 at 03:08:16 PM EST
[ Parent ]
The UK bond yield curve looks scary (according to the conventional wisdom that an inverted yield curve forecasts a recession).

The US looks set for a rough 3 years, while Japan and Germany look more healthy.

Can the last politician to go out the revolving door please turn the lights off?

by Migeru (migeru at eurotrib dot com) on Mon Jul 9th, 2007 at 05:05:58 PM EST
[ Parent ]
Yes, I've seen this a few weeks ago, they seem set for a meltdown like we haven't seen in ages. Hope you have an open return (escape ?) ticket Mig, 'cos Sarko will wall off the chunnel when the refugees start milling.

I'm not sure why the BoE raised the rates so steeply. Is it to fend off imported inflation, pumping the Sterling in the face of the foreign account deficit that is developing with the North Sea cliff ? They had to know that'd prick the bubble

Pierre

by Pierre on Mon Jul 9th, 2007 at 05:20:30 PM EST
[ Parent ]
Apparently the UK bond yield curve has been inverted for at least 3 years, but the slope keeps getting steeper.

Can the last politician to go out the revolving door please turn the lights off?
by Migeru (migeru at eurotrib dot com) on Mon Jul 9th, 2007 at 05:22:26 PM EST
[ Parent ]
I pretty much agree. I'll be dumping my oil related stocks before the year is over, but likely picking them back up within 18 months even if the predicted recession hasn't ended by then.

you are the media you consume.

by MillMan (millguy at gmail) on Mon Jul 9th, 2007 at 04:06:10 PM EST
[ Parent ]
Is it that oil is gaining value, or is it that the dollar is losing value?

How does oil look against (say) sterling, the Euro and the Kuwaiti Dinar?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Jul 9th, 2007 at 12:28:47 PM EST
Although the US$ is parting ways from other major currencies, the difference is small against oil price variations.

Remember that oil was below 50$ in the beginning of the year and now is nighing on 80$. The currency variations have much lower amplitude. That's almost a 60% increase.

Vencit omnia veritas.

by Luis de Sousa (luis[dot]a[dot]de[dot]sousa[at]gmail[dot]com) on Tue Jul 10th, 2007 at 05:38:37 AM EST
[ Parent ]
From Salon.com I understood that the IEA report still downplays the threat of peak oil. Here is their first (and the only?) mention of "peak oil" on page 30 (out of 82):

The concept of peak oil production and its timing are emotive subjects which raise intense debate. Much rests on the definition of which segment of global oil production is deemed to be at or approaching peak. Certainly our forecast suggests that the non-OPEC, conventional crude component of global production appears, for now, to have reached an effective plateau, rather than a peak...

    While there might be a temptation to extrapolate this trend, citing a peak in conventional oil output, a degree of caution is in order. Firstly, the concept of "conventional" oil changes with time, technology and economics. In the early 1970s, much offshore production was deemed unconventional, but this portion of global supply has since grown to account for 30 percent of the total. Evolving economies of scale and infrastructure development could do the same for [gas-to-liquid], oil sands and ultra-deepwater reserves in the future, shifting today's unconventional resource into tomorrow's conventional supply category...

    Finally, we note that focusing on non-OPEC crude alone is a rather selective way of considering the sustainability of global oil production. Peak or plateau production is frequently taken as shorthand for impending resource exhaustion. While hydrocarbon resources are finite, nonetheless issues of access to reserves, prevailing investment regime and availability of upstream infrastructure and capital seem greater barriers to medium-term growth than limits to the resource base itself.

Here is how Salon.com's Andrew Leonard interprets that:

To drastically summarize the report: The problem is not that the world is running out of oil, but that right now, offshore oil rigs are scarce and expensive, skilled labor is tight, transport infrastructure is limited, and political considerations such as "resource nationalism" in states such as Venezuela and Russia and geopolitical risk in Iran and Nigeria are hampering investment and development. Logistics are the real problem, the report seems to be saying, and not the actual amount of oil in the ground. This leads to the conclusion that even though nearly 3 million barrels of new supply will be needed each year just to offset the decline in established oil fields, "above-ground supply risks are seen exceeding below-ground risks in the medium term."

But there's a problem with this formulation that demonstrates a very careful, if not disingenuous, attempt to skirt the troubling implication of "peak oil." Peak oil does not mean, as has been emphasized a thousand times before, here and elsewhere, that "the world is running out of oil." It means that "the world is running out of cheap oil."

And that interpretation seems to be completely justified by the IEA report. Take, for instance, BP's much delayed "Thunder Horse" Gulf of Mexico offshore oil project. The IEA report notes that the project has faced a "perfect storm" of problems, including technical issues related to the new challenges of ultra-deepwater oil drilling, hurricanes and more mundane bumps in the road. Then the report notes that "Other projects may not face the same litany of problems as Thunder Horse, but as incremental non-OPEC supply becomes increasingly concentrated in technologically challenging areas, so cost over-runs and delays will remain part of the industrial landscape."

That's the most important sentence in the report. New supply is going to be harder to get, posing greater technological challenges and requiring higher levels of investment.

And yeah, the same salon.com introduces some peak oil computer games. Wanna play?

by das monde on Tue Jul 10th, 2007 at 12:58:53 PM EST


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