Tuesday, July 10, 2007

According to the IEA There Will Be Energy Supply Problems within 5 Years

With all the talk about CDOs, CMOs, etc. energy issues have slipped off the radar. The International Energy Administration (IEA) annual medium term forecast of energy supply and demand forecasts that the demand for oil will start to outstrip supply after 2010, from Market Watch. This will translate into higher prices although they gave no indication of what the increases would be.

In case you find the IEA forecast hard to believe, according to an article in Bloomberg China’s crude oil imports for June of this year jumped 20% over June 2006.

The peak oil discussions in one way may be correct because oil production appears to have leveled-off and it is increasingly difficult (and expensive) to increase production. But the real issue is not that supply is falling, it is that demand is outstripping supply and outstripping the ability of companies to provide sufficent refined products.

Crude-oil supplies will be tighter in coming years, with a "supply crunch" after 2010 as OPEC's spare production capacity evaporates, the International Energy Agency predicted Monday.
Supplies will tighten because economic growth will drive up demand and offset significant increases in oil-refining capacity, the IEA said, according to media reports citing the agency's annual medium-term forecast.

According to the IEA report cited by the WSJ:

• Global oil demand is projected to expand 2.2% a year, on average, reaching 95.8 million barrels a day by 2012, up from 86.13 million barrels a day this year. The forecast is based on global economic growth of about 4.5% annually. Oil demand is expected to increase most rapidly in Asia and the Middle East.
• The Organization of Petroleum Exporting Countries, which supplies more than 40% of the world's daily oil needs, will have little spare capacity left by 2012.
• Increases from non-OPEC oil producers and biofuel producers should start flagging after 2009.
• Natural-gas markets also will be tight because of inadequate supply increases, limiting the ability of consumers to switch between oil and natural gas.

Should GDP growth slow an annual 3.2% in the years to 2012, the need for OPEC oil would be reduced by some 2 million barrels a day, but that would merely postpone by a year the point at which demand surpasses the growth in global oil capacity, according to the report.

The IEA pegged total growth in non-OPEC supply at 2.6 million barrels a day by 2012, to 52.56 million barrels a day from 49.98 million barrels a day in 2007 about half the rate of projected growth in demand, according to the report.

The IEA also said OPEC's spare capacity, the safety cushion in the world system, is expected to remain constrained until 2010, then shrink to minimal levels by 2012, when the exporters collectively will be able to pump only a paltry extra amount , the equivalent of 1.6% of world demand, according to the Journal.

The shrinking of OPEC's spare capacity in the past decade has made the oil market skittish about any development that could conceivably threaten supply, resulting in volatile markets and prices.

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