Oil, oil, toil and trouble
It looks like the International Energy Agency are getting ready to admit what a lot of us have feared for quite some time: oil's going to be a lot scarcer by and by.
For several years, the IEA has predicted that supplies of crude and other liquid fuels will arc gently upward to keep pace with rising demand, topping 116 million barrels a day by 2030, up from around 87 million barrels a day currently. Now, the agency is worried that aging oil fields and diminished investment mean that companies could struggle to surpass 100 million barrels a day over the next two decades.
The decision to rigorously survey supply -- instead of just demand, as in the past -- reflects an increasing fear within the agency and elsewhere that oil-producing regions aren't on track to meet future needs.
"The oil investments required may be much, much higher than what people assume," said Fatih Birol, the IEA's chief economist and the leader of the study, in an interview with The Wall Street Journal. "This is a dangerous situation."
I admit I was initially skeptical when analysts started arguing that OPEC has had systematic incentives to inflate their reserve figures (because their quotas are set based on their stated reserves). That's looking more and more and more plausible.
Meanwhile, OPEC countries often aren't fully developing what they've got. There's still a spectre haunting OPEC--the spectre of the great crashes of the 1980s and 1990s, when sudden price declines threw their economies--and their political systems--into turmoil. Plus there's the fact that most of their oil companies are state-owned behemoths. For all the commenters who pile in here to tell me that the government isn't either less efficient than the private market--well, go tour any of OPEC's state oil companies (with the possible exception of ARAMCO, which the Saudis won't let you see anyway) and report back. They're a mess.
As I understand it, oil field development isn't just a matter of leaving it in the ground or pumping it; there is an optimal rate (or a few) to maximize the field's total production. The underinvestment, or malinvestment, in places like Venezuela is actually making the country worse off over the long run.
The IEA's report will be far from perfect, since some of the biggest producers, like Venezuela, Iran and Saudi Arabia, are not cooperating. Nonetheless, it's a big improvement over the previous forecast methods:
The IEA's study marks a big change in the agency's efforts to peer into the future. In the past, the IEA focused mainly on assessing future demand, and then looked at how much non-OPEC countries were likely to produce to meet that demand. Any gap, it was assumed, would then be met by big OPEC producers such as Saudi Arabia, Iran or Kuwait.
But the IEA's pessimism over future supplies has been building for some time. Last summer, the agency warned that OPEC's spare capacity could shrink "to minimal levels by 2012." In November, it said its analysis of projects known to be in the works suggested that the world could face a shortfall by 2015 of as much as 12.5 million barrels a day, unless there was a sharp drop in expected demand. The current IEA work aims to tally the range of investments and projects under way to boost production from the fields in question to get a clearer sense of what to expect in production flows.
What to expect, apparently, is a sharp mismatch between supply and demand that will be corrected via higher prices. We don't know for sure, of course, because the report won't be out for months, but this comports with most analyst sentiment--and of course, the now record $135 a barrel.
I used to be able to follow those "record" prices with the comforting statement that they weren't really records in real terms. But now we're in uncharted territory.