“Supply crunch” is not peak oil – IEA | David Strahan

“Supply crunch” is not peak oil – IEA
Posted on Wednesday, November 7th, 2007

There is no contradiction between the International Energy Agency’s forecast of long term oil supply growth to 2030 and a “supply crunch” by 2015, according to its chief economist Fatih Birol. Mr Birol insisted today that the short term crisis would not be caused by a fundamental shortage of oil but by entirely man-made factors.

Speaking at the launch of the IEA’s latest World Energy Outlook in London, Mr Birol reiterated both the Agency’s long term forecast that oil production will reach 116 million barrels per day in 2030 – up from around 86 mb/d today – and the evidence that supply will fail to to meet demand much sooner. The IEA’s reference case demand forecast requires an additional 37.5 mb/d in gross production capacity by the middle of the next decade, but new projects announced so far by oil companies will add only 25 mb/d, leaving a shortfall of 12.5 mb/d.

In answer to a question from lastoilshock.com, Mr Birol denied there was any contradiction between the two predictions, because any short-term crisis would be solely due to above-ground factors: “What we are saying is we could have a supply crunch to 2015 if we do not see enough investments coming to the markets, if we do not see production growing at a level to compensate the declines and meet the demand, and if the oil demand growth is not dampened in the OECD countries, China and India.”

IEA Deputy Executive Director William Ramsey added that major oil projects take about 5 years to complete, so the Agency could not yet know what additional capacity Saudi Arabia or Kuwait might bring on during 2012-2015. He also suggested that the rising oil price may trim demand growth and that this could also reduce the looming gap. “The supply crunch is not inevitable”, he said, “not by a long shot”.

However, Mr Birol also seemed to caution against too much reliance on the IEA’s long term forecast: “When we say in 2030 that the Saudi production will increase, Kuwait will increase, others will increase, this does not mean that we are saying in any case they will do it. We say they have the potential, when you look at their official reserves estimates, and if they put the money there, they have the potential to meet the gap between demand and non-OPEC production.” Previous IEA publications have queried official OPEC reserve numbers.

The IEA’s long term forecast is also undermined by its reliance on oil resource estimates from the United States Geological Survey that are widely regarded as wildly over-optimistic, and which the Agency will reappraise for its next WEO to be published this time next year.

Last week both Christophe de Margerie, CEO of Total, and Shokri Ghanem, head of Libya’s National Oil Company, said oil production would never top 100 mb/d, far below the IEA forecast, while Sadad al-Huseini, former head of E&P at Saudi Aramco, said oil production has already reached its ultimate plateau.

An outcome that depends on multiple contingencies becomes less certain as the list of contingencies grows longer.

Mr Birol says:
“What we are saying is we could have a supply crunch to 2015 if we do not see enough investments coming to the markets, if we do not see production growing at a level to compensate the declines and meet the demand, and if the oil demand growth is not dampened in the OECD countries, China and India.”

Just for argument we could assign a 90% probability that there will be enough investment; 90% probability that production will grow faster than decline; and 90% probability that demand will be damped. The collective probability of all three events happening is only 73%.

You are welcome to adjust the investment probability as you wish to account for what Matt Simmons has said about the rusting and greying of oil sector infrastructure and human capital. And you can adjust the other factors also depending on your views.

But throw in additional factors such as weather and wars to make the contingency list grow longer, and it appears that the statement that a crunch by 2015 will be attributed solely to above ground factors has an ironic truthfulness.

There was one thing in particular that caught my attention. Birol makes the usual point that it isn’t in OPEC’s interests for oil prices to be too high as it leads to the major consuming countries taking steps to reduce their demand, but then in the next paragraph he seems to contradict himself, saying:

“In an alternative policy scenario, which looks at the policies and measures in the OECD countries, China and India, all the policies under efficiency, biofuels, nuclear and all of these things, if they were to be implemented as of tomorrow – all these efficiency policies, renewable policies, everything – still Opec’s market share and Opec oil demand will go up. So, the call on Opec, whatever the policy the countries have, will increase. Therefore I do not see any problem from the security of demand point of view.”

This is far more in line with my own point of view, but the interviewers didn’t pick him up on this apparent contradiction.