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World Energy Outlook: The IEA’s winners and losers

The US will overtake leading producers within the next five years, says WEO

The US will by 2017 overtake Saudi Arabia as the world’s biggest oil producer and, even sooner, surpass Russia in natural gas output. That was the headline-grabber today as the International Energy Agency (IEA) released its World Energy Outlook 2012, a dossier of energy trends for the next 23 years.

As befits a 668-page dossier, though, there are devils aplenty in the details. Global energy trade patterns are undergoing a major shift – and not everyone will benefit from them. Taking the IEA’s forecasts at face value, here is Petroleum Economist’s breakdown of who wins and who loses if the world’s energy evolves as the agency expects.

Winners

Market principles

Countries can find their own energy if the price is right. There is a lag between surging prices and surging production, but eventually the market works. The US tight-oil success is the most obvious signal of this. Oil output there hit a low of 6.9 million barrels a day (b/d) in 2008, but the Bakken effect lifted it to 8.1m b/d in 2011. The IEA says US oil output will reach 11m b/d by 2020, in the process overtaking Saudi Arabia’s production. 

This trend is plain elsewhere, too. A decade of strong oil prices has reversed the story of declining oil output. The reserves-to production ratio, which tells the world how much oil is left, has been steadily rising, and hit 55 years at the end of 2011, says the IEA. Thanks to new technology, most of the growth has come from additions to reserves in existing fields. Since the turn of the century, says the agency, the average size of discovered oilfields has increased, reversing the historical trend.

High prices have also affected demand, especially in OECD countries. Consumption will keep rising – from 87.4m b/d last year to 105.4 i b/d in 2035 – but the speed of the rise has slowed. Gone are the days when the IEA said oil demand would reach 110m b/d. Under the agency’s New Policies Scenario, demand will rise by just 12m b/d in the next 22 years.

Meanwhile, the OECD’s oil consumption in 2035 will be 37.6m b/d – 4.5m b/d less than last year and beneath demand in 1990. Oil prices will remain expensive, reaching $125 a barrel (in 2011 dollars) by 2035; consequently oil’s share of fuel use will keep falling across the world. Above all, old assumptions about 1.5% trend oil-demand growth are over. Under existing policies, oil demand will rise by just 0.8% a year to 2035. If energy conservation strategies are adopted as the IEA hopes, the figure will be -0.4%.

Unconventional oil and NGLs

Crude-oil production will rise by just 2.8m b/d between now and 2035, reaching 70.8m b/d, reckons the IEA. By contrast, unconventional output, 3.9m b/d last year, will hit 15m b/d in 2035. Natural gas liquids (NGLs) output will rise to 19.5m b/d. Canada, the US, Venezuela and several smaller producers of unconventional oil should be sitting pretty. Others will step up their search for this new bonanza. Bear in mind, though, that a barrel of NGLs packs far less energy punch than a barrel of crude oil. There’s a big difference between a crude-oil-producing powerhouse (Saudi Arabia) and a propane one (the US), noted one analyst after the IEA’s press conference today.

Iraq

Iraq is pivotal to global oil supplies, says Birol. Without it crude markets are headed for choppy waters. In the IEA’s outlook, Iraq’s output rises to around 6.1m b/d by 2020 and 8.3m b/d by 2035. That will account for 45% of global oil output growth. Opec quotas, political risk and water – critical to oil production in the country – remain threats to Iraq’s potential. But a budding “Baghdad-to-Beijing” axis, in Birol’s words, should underpin the country’s re-emergence as a major player in the oil world.  

Opec

The US may be disappearing as an Opec client state and the oil industry agog about unconventionals, but the group’s grip on global supplies is rising. Opec output capacity was 35.7m b/d last year, or 42% of global production. By 2035 it will be 50.5m b/d, or 48%. Its Mideast members will also have a lock on the fastest-growing segment of the global oil market. By 2035, almost 90% of the region’s exports will go to Asia. 

Losers

Europe and Japan

The OECD will undergo an energy split of its own. While US industry will thrive on cheap energy prices and its citizens enjoy secure local supplies of oil and gas, the EU’s dependence on oil natural gas imports will rise from around 60% now to more than 80% by 2035. EU electricity prices five times those in the US and eight times those in Asia will be a big drag on the EU’s competitiveness and on the purchasing power of the people living in the bloc, said Birol. Spare a thought for Japan, another economy in the doldrums. Its import dependency and energy prices will be even higher.

The poor

A fifth of the world’s population – 1.3bn people – lack electricity. But rising energy supply and demand won’t do much for them in the coming two decades. The IEA said those without electricity by 2035 will still number about 1.1bn – something Birol described as “economically, morally, and socially unacceptable”. The bulk of the energy poor will be in sub-Saharan Africa.

The climate

The IEA made a plea for conservation as a “hidden fuel”. Measures to control demand could save the equivalent of half China’s coal demand this year or, in oil terms, the equivalent of Russia and Norway’s combined crude output. 

But Unless you’re a coal producer, things look bleak. We’re still on an “unsustainable path” in the way we burn fossil fuels for energy, said IEA chief Maria van der Hoeven. Emissions hit another record high last year. Coal is the fastest-growing source of primary energy. It met 45% of the growth in global energy demand in the past decade and its share of the world’s fuel mix will keep rising under existing policies. Coal-demand growth, rocketing ahead at 5.6% a year, is mainly a “non-OEC affair”, says the IEA. But that’s not terribly reassuring, given that non-OECD dominates total global energy-demand growth.

Renewables are rising, too, but they depend on subsidies. These need to rise to $240bn a year to promote significant uptake in supply, says the IEA. Last year, such subsidies amounted to $88bn. In contrast, fossil-fuel subsidies rose by almost 30% last year, to $523bn. Middle East and North African governments were the main culprits, responding to civil unrest on their streets. Renewables subsidies, on the other hand, tend to come from OECD governments – and many of them are broke. The renewables industry is “under strain”, says the IEA.

The global economy

All-time high oil prices are acting “as a brake on the global economy”, says the IEA. Yet the IEA reckons they are here to stay. Oil prices will increase to $125/b by 2035 (in 2011 dollars), said Birol. The good news is this should keep investment in oil supplies flowing. Birol said that the renaissance in US oil production, for example, would only be threatened if prices sank beneath $75-80/b – a comfortable price for Saudi and other producers, but not for North America’s unconventional drillers. But if oil prices of $110/b are too high for the global economy now, the world has some adjusting to do if it is to cope with even higher prices over the long term.

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