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IEA: Oil Markets Should Calm


Global oil producers managed to push production up an additional 300,000 barrels per day in August, while the global demand forecast remained flat from the prior month, according to the International Energy Agency’s monthly Oil Market Report. (Click on chart at right to enlarge.)

Overall output from non-OPEC producers dropped 150 kb/d, offset by a 410 kb/d increase in OPEC crude production. Nevertheless, the IEA expects non-OPEC production to grow by 1.28 mb/d in 2004 and 1.25 mb/d for 2005.

Russian production reached 9.35 mb/d, 45 kb/d up on July and 675 kb/d above last year. This level of production essentially makes it tied with Saudi Arabia, which added 300 kb/d production in August to reach 9.5 mb/d.

August OPEC crude supply was 29.3 mb/d. The increase in OPEC production comes at the cost of a concomitant reduction in spare capacity to respond to a major disruption in supply. The IEA estimates that OPEC holds just 310,000 barrels a day of spare capacity, though an extra 1.85 million may be available on a surge basis.

There are a few wildcards in OPEC spare capacity, one being Iraq, the other being Saudi Arabia. If Iraqi production can stabilize, then the tightness in supply capacity will ease. In August, however, Iraqi supply dropped 100 kb/d to an average 1.8 mb/d due to the attacks on the infrastructure. Much of the expected oil production capacity buffer, then, is laid on Saudi Arabia.

Key in this regard is Saudi Arabia’s reported capability to reach 10.5 million barrels per day compared to this report’s assessment of 9.5 million barrels per day sustainable capacity.

There is growing concern over Saudi Arabia’s production capabilities, frequently expressed by Matthew Simmons, the energy investment banker, and vigorously rebutted by Saudi Aramco.

The IEA, which usually does not comment on oil prices, was blunt this month in its assessment of price, supply and demand.

While demand is rising, so too is global supply ... Geopolitical risks remain real but they are no greater today than they were in the past. And despite the ongoing rhetoric over Yukos [the embattled Russian oil company], Russian production keeps rising month after month.

Suggestions of sustained 40-dollars-plus prices assume that supply and demand do not respond to price, that technology has run its course, that governments are helpless in pursuing energy policies, that recessions are a thing of the past and that Chinese oil demand will grow unchecked forever. Perhaps, but we have our doubts.

What is clear for now is that supply is running ahead of demand and stocks are building.

Perhaps, but we have our doubts. That Panglossian view may serve to calm an overexcited market in the short term, but it does nothing to promote urgent steps to deal with what everyone in the industry recognizes as an eventual phenomenon: peaking of production. Whether you are pessimistic or optimistic, you still recognize that we will hit peak production. The date is in question, not the outcome.

By all but perhaps the most extreme views, global oil production has not yet peaked, although localized production certainly has. The pricing frenzy of this summer—which may not yet be over, depending on the stability of some of the key producing countries—was a preview, not the main event.

Peaking is a function of the size of the recoverable oil reserves. There are thus two factors that make the actual timing hard to pin down. First is the inability to really know just how much oil is actually present. Second is the evolution of technology that allows for enhanced oil recovery, ultra deep-water drilling, and so on, that increases the size of the recoverable reserves. Different groups build different models.


In its current newsletter, ASPO (The Association for the Study of Peak Oil), plotted the results of 76 of those different models and estimates of ultimate recoverable global reserves. Most of the estimates were published by major oil companies and serious scientific institutions.

Despite some outliers, that chart (at right) shows a fair degree of consensus. (Click on chart to enlarge.)

There is a consensus, notwithstanding the range of uncertainty and of definition, from which only a few eccentric high estimates depart. The average works out at 1,930 Gb, of which 920 Gb, or almost half (48%), have been consumed. It is, therefore, hardly surprising that production approaches its long-term decline towards eventual exhaustion. High prices are inevitable until demand can be reined in either by market forces, spelling recession, or sensible government policy.

In its own depletion model, ASPO has moved the date of peak production up (closer) to 2006.

Whether the date is 2006 or 2016, it is not very far off. It is past time for those sensible government policies mentioned by both IEA and ASPO.

The rapid penetration of hybrid and diesel technology into the fleet described in the ORNL forecast (earlier post), yields an aggregate increase in fuel economy of only 4% by 2012. The ORNL study also presumes no further increase in fuel economy regulations.

We must do better. That push for a dramatic increase in fuel economy can come from regulation, or it can come from the marketplace. Ideally, it will be a combination of the two. The marketplace is faster and more certain. Automakers can game regulations, find loopholes and the like. But if buyers shift their preferences steadfastly to greater fuel economy, that’s where the automakers will flow. Policy can help make that shift in preference swift—a carbon tax or a higher gasoline tax, for example, or incentives for purchasing high fuel economy cars or mass transit.


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