The age of cheap oil is over, says the IEA
Oil prices could reach $135/b by 2035 says the IEA, as conventional output declines, while China drives rising demand, reports Helen Robertson
Expect more oil price hikes as conventional output declines, while demand rises, especially in Asia, says the International Energy Agency (IEA). "The age of cheap oil is over," says Fatih Birol, the IEA's chief economist. "To find market equilibrium we may need higher prices."
In an interview with Petroleum Economist, Birol said that today's oil prices of between $85 and $90 a barrel are "already a threat to the world's economic recovery" and are putting a lot of pressure on the trade balance between countries (PE 11/10 p12).
Nobuo Tanaka, the IEA's executive director, said the world faces "a veil of uncertainty" over global energy security because of increased oil demand and falling production. Global oil output is set to reach 99m barrels a day (b/d) by 2035, 15m b/d higher than in 2009, but conventional crude oil production will plateau at around 68.5m b/d by 2020 and will never again reach its 2006 peak of 70m b/d.
The forecast is based on the agency's New Policy Scenario, in its World Energy Outlook 2010, which accounts for broad, government-led policy commitments to combat global warming. In the IEA's alternative 450 Scenario, which bases forecasts on action needed to curb global warming to within 2°C, conventional crude output could peak at 66.5m b/d in 2020 and then fall sharply as investment in upstream capacity tails off. In the 450 scenario, oil production will fall from 83.3m b/d in 2009, to 81m b/d in 2035.
Under the Agency's Current Policies Scenario, which recognises only policies that had been adopted by mid-2010, global oil production would rise to 93.5m b/d by 2020, up by 12% over 2009, with a jump to 107.4m b/d in 2035 – 8.5% higher than under New Policies and nearly 33% higher than under the 450 prediction.
Oil demand will be driven entirely by non-OECD countries, specifically China, India and the Middle East, says Birol, with annual demand increases of 2.4%, 3.6% and 1.3% respectively. The transport sector will be the main force behind this growth.
Above all, China is now the "single most-important contributor to the global energy market," said Birol. How Chinese energy policy evolves will have a profound effect on the rest of the world says the IEA. With GDP growth of 12% in 2009, China's was one of the only large economies to expand during the recession. Under the New Policy Scenario, Chinese oil demand will almost double by 2035, reaching 15.3m b/d.
Unconventional oil – defined as Canada's oil sands, Venezuelan heavy oil, oil shales, and fuels derived from natural gas (GTL), coal (CTL) and biomass (BTL) – will play an increasingly important role offsetting weaker conventional production. Under the New Policy Scenario, output will rise from 2.3m b/d in 2009 to 9.5m b/d in 2035.
And Canada's oil sands will make a "significant contribution" to maintaining global oil production levels, said Birol. Oil-sands production is forecast to climb from 1.3m b/d in 2008, to 4.2m b/d in 2035, with around two thirds of the increase coming from in-situ projects. But the rate of unconventional-oil expansion will be determined by the costs of developing the resources and of limiting projects' environmental impact.
Opec's share of global oil production will rise to 50% from 40%, with Iraq accounting for a large part of this increase. Iraq could outstrip Iran's output by 2025, reaching 7m b/d by 2035, says the agency.
And the Caspian region could also make a "significant contribution" to maintaining global energy-supply security. Central Asia has "substantial" oil and gas resources that could boost production and exports over the next two decades, says the agency. Caspian output could jump from 2.9m b/d in 2009 to a peak of 5.4m b/d between 2025 and 2030, accounting for 5.6% of world supply. Gas production could almost double from 159bn cubic metres (cm) in 2009, to 315bn cm by 2035.
But several factors could impede development. The difficulties of financing and constructing pipelines across multiple countries, the investment climate and uncertainties over demand could constrain expansion.
Natural gas will be "central" to meeting world energy needs, said Birol, and will have "substantial implications for climate change and the geopolitics of energy". Global demand, which fell in 2009 as a result of the economic crisis, is set to rise steadily from 2010. Under all of the IEA's 450 policy prediction, gas is the only fossil fuel for which demand is higher in 2035 than in 2008, because of the abundance of global resources and gas's environmental benefits. On average, gas releases 50% less carbon dioxide (CO2) than coal when burnt.
But the global gas glut could negatively affect the development of greener energy sources, says the IEA, as a cheap supply of gas will make renewables less commercially viable. The gas glut is a result of lower demand during the economic downturn and an abundance of liquefied natural gas displaced by North America's shale-gas revolution (see p3).
The glut could reach 200bn cm by 2011, says the agency, but, from 2035, gas trade will begin to skyrocket, to levels 80% higher than in 2008, as growing demand dissipates the spare capacity. Demand is set to reach 4.54 trillion cm in 2035, a 44.5% rise over 2008 levels. China's demand grows fastest, at almost 6% a year for the next two decades.
But China could also contribute to global gas supplies by developing a domestic unconventional-gas industry (see p31). And, globally, unconventional production will make up one third of the growth in the gas sector, with shale-gas and coal-bed methane production from China and Australia being important contributors.
This shift to gas is crucial, says the IEA, if the world is to have any chance of limiting global warming to within 2°C. But governments worldwide must commit fully to pledges to lower CO2 emissions made at the 2009 UN Copenhagen climate summit. "The sustainability of our energy system is married to government action," said Tanaka.
"If we are serious, we need to increase our decarbonising efforts by 400% by 2035," says Fatih Birol, and Chinese policy is crucial to making this happen. As the biggest polluter in the world, with the fastest growing economy, China is the colossal force pushing oil-demand growth in the transport sector – the main industry driving CO2 emissions.