A revolutionary report on the future of oil

When talking about oil production in non-OPEC nations, the report admits that conventional crude oil production from these nations is declining and is only maintained at current levels by new, non-conventional sources of oil. However, the IEA then attempts (rather unconvincingly) to avoid declaring that non-OPEC oil production has peaked by saying that the definition of what is “conventional” crude oil changes with time:

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.

OPEC is expected to provide an additional 4mb/d of crude oil by 2012, an increase of over 11 per cent from this year (and almost half of this increase is expected to come from Saudi Arabia which has recently shown falls in production - see also the preceding comment on Saudi Arabia).

Other points of interest in the report

Growing demand from China and other developing nations will be the central cause of “market tightness”:

The main driver of demand growth in Asia will be China ... Given the country’s booming economy, oil product demand is projected to increase by 5.6 per cent per year on average … roughly a quarter of the world’s annual demand increase.

But India’s role in the oil market is overestimated:

It is worth emphasising that, despite the similar size of their populations, India and China are not in the same league with regards to oil demand. The frequently quoted concept of “Chindia” is misleading: India’s demand will barely represent a third of China’s by 2012.

The report speaks surprisingly frequently of delays in both oilfield development and refinery construction due to a number of factors. For example, when forecasting production from new projects in non-OPEC nations, the report states:

Slippage varies between two and 36 months, but is typically around six months … shortages of labour, raw materials, fabrication and drilling capacity and transport infrastructure may continue to undermine output growth for some time.

The report is also notable for its pessimism (i.e. realism) about the potential of biofuels. The report’s authors sound very similar to peak oil advocates when warning of the potential for biofuel production to raise food prices and the effects this will have on poorer nations:

Such a lifting of agricultural prices could have far-reaching global economic effects - even excluding the moral issues related to food supply …

… The International Monetary Fund (IMF) warned in a recent report that global food prices had risen by 10 per cent in 2006, in part due to higher US demand for corn (for ethanol production). Demonstrations against higher corn prices were reported in Mexico, where it is a staple of the national diet.

… There are similar worries about the environmental impact of biofuels. Hailed by some as an easy way to limit carbon emissions, others have pointed at the scope for environmental damage. … forests are being razed for feedstock plantations, offsetting potential gains through carbon capture. … In many countries there is concern that increased corn production will put a significant strain on available water.

Concluding remarks

The IEA Medium Term Market Report is 82 pages long and contains much more of interest than I have summarised here.

The most pessimistic supporters of peak oil believe that decline of total world oil production is imminent. Indeed, I previously described how major figures in the industry such as energy investment banker Matt Simmons, oil entrepreneur T. Boone Pickens and retired National Iranian Oil Company Vice-President Ali Samsam Bakhtiari believe we are now at peak.

Nevertheless, the IEA Medium Term Report is refreshingly open and balanced in its approach to this most vital of topics. It is a further nail in the coffin for the irresponsibly optimistic future oil production scenarios painted by industry cheerleader Cambridge Energy Research Associates and the biggest of Big Oil - ExxonMobil. The publication of the IEA report means that the writing is now on the wall for all governments and industry to see.

Much higher oil prices can be expected within five years at best. Before this, a short, but deceptive, fall in oil prices may occur in 2008-9. It remains to be seen whether the political courage exists to openly discuss this issue and begin the painful process of weaning ourselves off oil. I am not optimistic.