Friday, December 11, 2015
The ongoing extended period of lower oil prices, while a benefit to consumers, also triggers energy-security concerns by heightening reliance on just a small number of low-cost producers, notes the Paris-based International Energy Agency (IEA) in its flagship 2015 World Energy Outlook released Nov. 10. Another risk is a sharp price rebound if energy investment falls short. However, the report finds that the plunge in oil prices has set in motion forces that can lead the market to rebalance through higher demand and lower supply growth, although those adjustment mechanisms rarely provide a smooth transition. 
“It would be a grave mistake to index our attention to energy security to changes in the oil price,” said Fatih Birol, IEA executive director. “Now is not the time to relax. Quite the opposite. A period of low oil prices is the moment to reinforce our capacity to deal with future energy security threats.”
IEA’s central scenario sees an oil market rebalancing to about $80/bbl by 2020, with further upward adjustments thereafter. Demand picks up in 2020, adding an average of 900,000 bbld a year, but a subsequent rise to 103.5 MMbbld in 2040 is moderated by higher prices, efforts to phase out subsidies, efficiency policies, and switching to alternative fuels. Collectively, the U.S., the European Union, and Japan see their oil demand drop by about 10 MMbbld by 2040. On the supply side, the decline in current upstream spending, estimated at more than 20% in 2015, results in the combined production of non-OPEC countries peaking before 2020 at just above 55 MMbbld. Output growth among OPEC countries is led by Iraq and Iran.
An annual $630 billion in worldwide upstream oil and gas investment—the total amount the industry spent on average each year for the past five years—is required just to compensate for declining production at existing fields and to keep future output flat at today’s levels. The current overhang in supply should give no cause for complacency about oil market security, IEA cautions.
The agency adds that the short investment cycle of tight oil and its ability to respond quickly to price signals is changing the way the oil market operates, but the intensity with which the tight oil resource is developing in the U.S. eventually pushes up costs over the survey period. U.S. tight oil production stumbles in the short term but resumes its upward march as prices recover, helped by continued improvements in technology and efficiency improvements. But tight oil’s rise is ultimately constrained by the rising costs of production as operators deplete the “sweet spots” and move to less productive acreage. U.S. tight oil output reaches a plateau in the early 2020s, just above 5 MMbbld, before starting a gradual decline.
IEA’s 2015 World Energy Outlook also examines the conditions under which prices could stay lower for much longer. Since prices at today’s levels push out higher-cost sources of supply, such a scenario depends heavily on the world’s lower-cost producers, and therefore reliance on Middle East oil exports eventually escalates to a level last seen in the 1970s. Such a concentration of global supply would be accompanied by elevated concerns about energy security.
The oil price in this scenario remains close to $50/bbl until the end of this decade before rising gradually back to $85/bbl in 2040. This trajectory, notes IEA, is based on assumptions of lower near-term growth in the global economy, a more stable Middle East, and a lasting switch in OPEC production strategy in favor of securing a higher share of the oil market, as well as a price that defends the position of oil in the global energy mix. Also in play is more resilient non-OPEC supply, notably from U.S. tight oil. With higher demand led by the transportation sector pushing oil use up to 107 MMbbld in 2040, the durability of this scenario depends on the ability and willingness of the large low-cost resource holders to produce at much higher levels than in IEA’s central scenario. In the low oil price scenario, the Middle East’s share in the oil market ends up higher than at any time in the last 40 years.
However, the likelihood of the oil market evolving in this way over the long term is undercut by the effect on producer revenues. OPEC oil export revenue falls by a quarter relative to the central scenario, despite higher output. And lower prices are not all good news for consumers. The economic benefits are counterbalanced by increasing reliance on the Middle East for imported crude oil and the risk of a sharp rebound in price if investment dries up. Concerns about gasoline supply security would also be heightened if prices stay too low to generate the necessary investment in supply.
Overall, world energy demand grows by nearly one-third between 2013 and 2040 in the central scenario, with net growth driven entirely by developing countries. IEA comments that the single largest energy demand growth story of recent decades is near its end—coal use in China reaches a plateau close to today’s levels as the country’s economy rebalances and industrial coal demand falls. At the same time, the largest oil consumer, the U.S., experiences one of the world’s largest reductions in demand from 2013 to 2040, declining by about 4 MMbbld and returning to levels last observed in the 1960s.
IEA summarizes that signs of change in global energy have multiplied in the 12 months since its last World Energy Outlook. Oil prices fell sharply, with the prices of other fuels moving in tandem in many parts of the world. Countries, including India and Indonesia, took advantage of the oil price decline to move ahead with their phase-out of fossil fuel subsidies. Amid turmoil in parts of the Middle East, a clear pathway opened up that could lead to the return of Iran, one of the world’s largest hydrocarbon resource holders, to the oil markets.
Further, renewables contributed nearly half of the world’s new power generation capacity in 2014. The coverage of mandatory energy efficiency regulation worldwide expanded to more than a quarter of global consumption. There was also a tantalizing hint in the 2014 data of a decoupling in the relationship between CO2 emissions and economic activity, until now a predictable link. The agency asserts it is more important than ever for policymakers, industry, and other stakeholders to have a clear understanding of the state of the energy sector today, to see which changes are transient or cyclical, which are here to stay, what risks and opportunities might lie ahead, and what can be done to put the energy system on a more secure and sustainable footing.
“It would be a grave mistake to index our attention to energy security to changes in the oil price,” said Fatih Birol, IEA executive director. “Now is not the time to relax. Quite the opposite. A period of low oil prices is the moment to reinforce our capacity to deal with future energy security threats.”
IEA’s central scenario sees an oil market rebalancing to about $80/bbl by 2020, with further upward adjustments thereafter. Demand picks up in 2020, adding an average of 900,000 bbld a year, but a subsequent rise to 103.5 MMbbld in 2040 is moderated by higher prices, efforts to phase out subsidies, efficiency policies, and switching to alternative fuels. Collectively, the U.S., the European Union, and Japan see their oil demand drop by about 10 MMbbld by 2040. On the supply side, the decline in current upstream spending, estimated at more than 20% in 2015, results in the combined production of non-OPEC countries peaking before 2020 at just above 55 MMbbld. Output growth among OPEC countries is led by Iraq and Iran.
An annual $630 billion in worldwide upstream oil and gas investment—the total amount the industry spent on average each year for the past five years—is required just to compensate for declining production at existing fields and to keep future output flat at today’s levels. The current overhang in supply should give no cause for complacency about oil market security, IEA cautions.
The agency adds that the short investment cycle of tight oil and its ability to respond quickly to price signals is changing the way the oil market operates, but the intensity with which the tight oil resource is developing in the U.S. eventually pushes up costs over the survey period. U.S. tight oil production stumbles in the short term but resumes its upward march as prices recover, helped by continued improvements in technology and efficiency improvements. But tight oil’s rise is ultimately constrained by the rising costs of production as operators deplete the “sweet spots” and move to less productive acreage. U.S. tight oil output reaches a plateau in the early 2020s, just above 5 MMbbld, before starting a gradual decline.
IEA’s 2015 World Energy Outlook also examines the conditions under which prices could stay lower for much longer. Since prices at today’s levels push out higher-cost sources of supply, such a scenario depends heavily on the world’s lower-cost producers, and therefore reliance on Middle East oil exports eventually escalates to a level last seen in the 1970s. Such a concentration of global supply would be accompanied by elevated concerns about energy security.
The oil price in this scenario remains close to $50/bbl until the end of this decade before rising gradually back to $85/bbl in 2040. This trajectory, notes IEA, is based on assumptions of lower near-term growth in the global economy, a more stable Middle East, and a lasting switch in OPEC production strategy in favor of securing a higher share of the oil market, as well as a price that defends the position of oil in the global energy mix. Also in play is more resilient non-OPEC supply, notably from U.S. tight oil. With higher demand led by the transportation sector pushing oil use up to 107 MMbbld in 2040, the durability of this scenario depends on the ability and willingness of the large low-cost resource holders to produce at much higher levels than in IEA’s central scenario. In the low oil price scenario, the Middle East’s share in the oil market ends up higher than at any time in the last 40 years.
However, the likelihood of the oil market evolving in this way over the long term is undercut by the effect on producer revenues. OPEC oil export revenue falls by a quarter relative to the central scenario, despite higher output. And lower prices are not all good news for consumers. The economic benefits are counterbalanced by increasing reliance on the Middle East for imported crude oil and the risk of a sharp rebound in price if investment dries up. Concerns about gasoline supply security would also be heightened if prices stay too low to generate the necessary investment in supply.
Overall, world energy demand grows by nearly one-third between 2013 and 2040 in the central scenario, with net growth driven entirely by developing countries. IEA comments that the single largest energy demand growth story of recent decades is near its end—coal use in China reaches a plateau close to today’s levels as the country’s economy rebalances and industrial coal demand falls. At the same time, the largest oil consumer, the U.S., experiences one of the world’s largest reductions in demand from 2013 to 2040, declining by about 4 MMbbld and returning to levels last observed in the 1960s.
IEA summarizes that signs of change in global energy have multiplied in the 12 months since its last World Energy Outlook. Oil prices fell sharply, with the prices of other fuels moving in tandem in many parts of the world. Countries, including India and Indonesia, took advantage of the oil price decline to move ahead with their phase-out of fossil fuel subsidies. Amid turmoil in parts of the Middle East, a clear pathway opened up that could lead to the return of Iran, one of the world’s largest hydrocarbon resource holders, to the oil markets.
Further, renewables contributed nearly half of the world’s new power generation capacity in 2014. The coverage of mandatory energy efficiency regulation worldwide expanded to more than a quarter of global consumption. There was also a tantalizing hint in the 2014 data of a decoupling in the relationship between CO2 emissions and economic activity, until now a predictable link. The agency asserts it is more important than ever for policymakers, industry, and other stakeholders to have a clear understanding of the state of the energy sector today, to see which changes are transient or cyclical, which are here to stay, what risks and opportunities might lie ahead, and what can be done to put the energy system on a more secure and sustainable footing.
