IEA´s unnaproved draft oil report

Published: October 30, 2008

by frog

For those who follow the oil game, the IEA´s announcement last May that their complete review of the world oil supply situation wouldn´t come out until the week after the US Presidential election came as no surprise. The last thing that any American administration would want to do is spook the markets just prior to an election.

However, the unprecedented oil price rises of the last four years, and the spike of the last eight months have already worked their magic and spooked the markets into precipitous decline.  The spike that burst the housing/credit bubble was made of oil.

Everyone knows intuitively that there has been something fundamentally wrong in the oil market over the last few years, but few were willing to call it what it is – the first shocks of the advent of peak oil.

Whether the peak is here already or will not come untill 2012, as is the average of opinions among oil experts, is irrelevant.The Hirsch report spells out in clear financial terms that it will take a crash course of at least twenty years to respond, so it is already too late for a smooth transition. Hence the economic upheavals have begun.

What the leaked IEA report says, according to the Financial Times, is that oil production is likely to decline by 9.1% per annum, which means we need to do one hell of a lot of drilling in order to keep production constant, let alone grow it.

Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, the World Energy Outlook, a draft of which has been obtained by the Financial Times.

The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and meet long-term de­mand. The effort will become even more acute as prices fall and investment decisions are delayed.

The IEA, the oil watchdog, forecasts that China, India and other developing countries’ demand will require investments of $360bn each year until 2030.

The agency says even with investment, the annual rate of output decline is 6.4 per cent.

The decline will not necessarily be felt in the next few years because demand is slowing down, but with the expected slowdown in investment the eventual effect will be magnified, oil executives say.

The battle to replace mature oilfields’ output could even offset the decline in demand growth, which has given the industry – already struggling to find enough supply to meet needs, especially from China – a reprieve in the past few months.

The IEA predicted in its draft report, due to be published next month, that demand would be damped, “reflecting the impact of much higher oil prices and slightly slower economic growth”.

Rumours are flying around the internet that the draft report was leaked because the authors had come under pressure to tone it down before publication. I suspect that the authors just want the market to be aware of the realities of peak oil. While it will be many decades before oil itself is a scarce resource, our inability to grow production means that we have a future of ever escalating prices ahead of us.

If I get out my crystal ball, I would forecast oil to bounce around in the $60 -$100 range until the financial crisis settles down, as the marginal cost of a new barrel of production is currently between $70 – $90 per barrel. Once the global economy is perceived to be back onto it´s exponential growth path, prices will spike once again before dropping back to the marginal barrel range as the growth bubble is burst once again by high oil prices. Each time this happens, the marginal barrel priced will ratchet up, taking the overall average price up with it. In short, I predict a wild roller coaster ride.

Bank on one thing – volatility.

frog says

Published in Environment & Resource Management by frog on Thu, October 30th, 2008   

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