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IEA sees oil supply peak looming ups price view

Reuters has a report on the latest IEA world energy outlook, which is starting to accept that the peak of crude oil production could have already occurred as a real possibility - IEA sees oil supply peak looming, ups price view. The Oil Drum has a summary of questionable assumptions an omissions - .

Global oil supplies will come close to a peak by 2035 when oil prices will exceed $200 a barrel, the International Energy Agency said on Tuesday, as China and other emerging economies drive demand higher.

The IEA, in its 2010 World Energy Outlook, said conventional crude oil output had already peaked and would flatten out in the next 10 years, boosting reliance on costlier and more polluting unconventional sources such as oil sands.

"Production in total does not peak before 2035, though it comes close to doing so," the IEA said in the executive summary of the report. That projection was according to the reports central case, the New Policies scenario.

The Paris-based IEA, which advises 28 industrialised countries, also raised its mid- and long-term oil price forecasts, despite slashing oil demand estimates by 2035, citing growing supply uncertainty.

Oil prices would rise even further if governments did not act to curb consumption, the IEAs chief economist and lead author of the report, Fatih Birol, told Reuters in an interview.

"The message is clear, the price will go up, especially if consuming countries do not make changes in the way they consume oil, especially in the transport sector," Birol said.

Oil hit $87.63 a barrel on Tuesday, the highest since October 2008, after hovering around $70-80 most of the year.

The world needed higher oil prices to change consuming habits substantially and spur investment as markets were becoming less sensitive to price changes, Birol said.

A key passage from page 125 of the report itself :

Public debate about the future of oil tends to focus on when conventional crude oil production is likely to peak and how quickly it will decline as resource depletion passes a certain point. Those who argue that an oil peak is imminent base their arguments largely on the indisputable fact that the resource base is finite. It is held that once we have depleted half of all the oil that can ever be recovered, technically and economically, production will enter a period of long-term decline.

What is often missing from the debate is the other side of the story — demand — and the key variable in the middle — price. How much capacity is available to produce oil at any given moment depends on past investment. Decisions by oil companies on how much and where to invest are influenced by a host of factors, but one of the most important is price (at least relative to cost). And price is ultimately the result of the balance between demand and supply (setting aside short-term fluctuations that may have as much to do with financial markets than with oil-market fundamentals). In short, if demand rises relative to supply capacity, prices typically rise, bringing forth more investment and an expansion of capacity, albeit usually with a lag of several years.

Another misconception is that the amount of recoverable oil is fixed. The amount of oil that was ever in the ground — oil originally in place, to use the industry term — certainly is a fixed quantity, but we have only a fairly vague notion of just how big that number is. But, critically, how much of that volume will eventually prove to be recoverable is also uncertain, as it depends on technology, which will certainly improve, and price, which is likely to rise: the higher the price, the more oil can be recovered profitably. An increase of just 1% in the average recovery factor at existing fields would add more than 80 billion barrels to recoverable resources (IEA, 2008). So, the chances are that the volume of resources that prove to be recoverable will be bigger than the mean estimate we use to project production, especially since that estimate does not include all areas of the world. Even if conventional crude oil
production does peak in the near future, resources of NGLs and unconventional oil are, in principle, large enough to keep total oil production rising for several decades.

Clearly, global oil production will peak one day. But that peak will be determined by factors on both the demand and supply sides. We project a peak before 2020 in the 450 Scenario. In the New Policies Scenario, production in total does not peak before 2035, though it comes close to doing so, conventional crude oil production in that scenario holding steady at 68-69 mb/d over the entire projection period and never attaining its all-time peak of 70 mb/d in 2006. In other words, if governments put in place the energy and climate policies to which they have committed themselves, as we assume in this scenario, then our analysis suggests that crude oil production has probably already peaked.

If governments act vigorously now to encourage more efficient use of oil and the development of alternatives, then demand for oil might begin to ease quite soon and we might see a fairly early peak in oil production. That peak would not be caused by any resource constraint. But if governments do nothing or little more than at present, then demand will continue to increase, the economic burden of oil use will grow, vulnerability to supply disruptions will increase and the global environment will suffer serious damage. The peak in oil production will come then not as an invited guest, but as the spectre at the feast.