Despite what appears to be a saturated oil market in
2014, oil producers around the world will struggle to meet rising demand over
the next few decades.
In its latest annual World Energy Outlook, the
International Energy Agency (IEA) warned that the current period of oil
abundance may be fleeting, and in fact, without heroic levels of production
increases, oil markets will grow dangerously tight in the coming years.
Global oil demand is expected to
increase by 37 percent by 2040, with a dominant proportion of that coming
from developing countries - i.e. China and India. In fact, the IEA says that
for every barrel of oil the industrialized world expects to eliminate from demand
through efficiency or other ways of reducing demand, developing countries
will burn through two additional barrels.
The IEA predicts that the world will need to extract an
additional 14 million barrels of oil per day (bpd) by 2040, which comes on
top of today's production levels of about 90 million bpd. While there is a
lot of triumphalism in the United States about shale oil production and how
places like the Bakken and the Eagle Ford have ushered in an era of
abundance, the IEA says that tight oil production in the U.S. - along with
Canadian oil sands - will only last until the mid-2020's.
After that point, when the shale revolution peters out,
oil markets revert to their old ways - that is, looking to the Middle East
once again to meet global demand. And that should raise some alarm. Saudi
Arabia will remain one of the largest and most important oil producers in the
world, but it probably won't be able to ramp up production much beyond its
current levels. There is some slack production in Iran, due to western
sanctions, but even when it returns to the fold it likely will only make a
small contribution to oil production growth in the long-term.
Instead, much of the world's hopes are pinned
disproportionately on Iraq. A year ago, after the IEA released its 2013 WEO, I wrote about how the IEA was placing
a surprising amount of faith in the ability of Iraq to scale up its oil
production. For several years, the IEA predicted that Iraq would be able to
triple its output from 3 million bpd to around 8.3 million bpd by 2035. Under
that assumption, oil prices would rise only a modest amount over that
timeframe.
That would have been a monumental task even before the
country began unraveling in June 2014. Since then, Iraq has been plunged back
into a state of war. The prospect that it can be put back together, and the
requisite levels of capital investment can be put into its oil sector in
order to add 5-6 million bpd over the next 20-30 years, appears fanciful to
say the least.
An estimated $900 billion will need to be deployed each
year beginning in the 2030s to bring enough oil online to meet global demand.
But the IEA also cautions that replicating the tight oil boom in the United
States will be very difficult. Different
geological conditions could pose some problems, but the long lead times and
opposition to drilling will also slow development in much of the world.
Unlike last year, this time around the IEA appears to be
more concerned. "A well-supplied oil market in the short-term should not
disguise the challenges that lie ahead, as the world is set to rely more
heavily on a relatively small number of producing countries," the IEA
Chief Economist Fatih Birol, said in a press release. And in its WEO Fact
sheet, the IEA declares "the task of bringing production above 100 mb/d
rests on a fairly limited number of shoulders."
Nick Cunningham
