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The Middle East will dominate again, says IEA

Middle East oil will dominate again when US supplies fade - unless high oil prices spur more efficiency first, writes Derek Brower

North America's soaring tight-oil output is stealing market share from Opec. But the Middle East's low-cost oil will be critical when the American burst fades after 2020, the International Energy Agency (IEA) said.

For now, the North American surge continues. US output will reach 11 million barrels a day (b/d) by 2015, making it the largest producer in the world two years earlier than the IEA predicted last year, the agency's chief economist Fatih Birol said.

But the trend of rising output from the country was unlikely to continue after the 2020s, he said. And Birol cautioned against giving "wrong signals" to Mideast producers that the world didn't need more oil from the region, lest they stop investing to increase capacity. This would threaten global oil supply, which must keep rising to meet growing demand from Asia.

By 2020, global oil consumption will reach 95.4m b/d, compared with 87.4m b/d in 2012, according to the central projection in the IEA's latest World Energy Outlook (WEO), which the agency calls its New Policies Scenario (NPS). By 2035, demand will hit 101.4m b/d.

Non-OECD countries will account for 96% of the extra oil-demand growth in the next 22 years, the IEA said, led first by China and, in the 2020s, by India. The Middle East will be the world's second-largest consumer of gas and third-largest of oil by 2035.

OECD consumption, however, is falling steeply and will shed 8m b/d of demand by 2035 compared with 2012. Europe's demand on its own would fall by 2m b/d in the period.

As the engine of demand growth moves to Asia and the Middle East, so would much of the refining, the IEA predicted. Spare throughout capacity by 2035 could amount to 20m b/d, leaving 10m b/d at risk of closure - much of it likely to be shuttered in Europe.

Bears in the fine print

Despite stressing the need for Mideast producers to keep investing in their upstreams, however, the IEA's WEO contains some worries for Opec.

One is demand, where a wide discrepancy has opened up between Opec and the IEA. Opec's annual World Oil Outlook, released just a week before the IEA's, forecast a sharp rise in global oil consumption to 108.5m b/d by 2035, more than 7m b/d above the IEA's number.

And while both forecasters agree that North America's production surge will fade, Opec's numbers revealed much greater scepticism about tight oil than the IEA's. After hitting a peak in 2017-19, tight oil supplies will slump to just 2.7m b/d by 2035, Opec reckoned. The rest of the world won't offer up any tight oil of its own by then, the cartel said.

"They're telling themselves that because that's what they want to believe," said one analyst, speaking of Opec's dim view of tight oil.

The IEA, by contrast, says US tight-oil production - on its own - will remain just shy of 4m b/d in 2035 (excluding another 2m b/d of natural gas liquids); and total world output will be more than 5.5m b/d. It acknowledged that other analysts US light-oil production to grow even more steeply in coming years and remain on line for longer.

Nor, according to the IEA's numbers, do the break-even costs of new unconventional oil plays look particularly vulnerable to a moderate fall in prices - refuting a mainstay theory for some sceptics. The IEA says $60-80/b leaves US light-tight oil output profitable.

On the demand side, Birol said the IEA's much lower forecast reflected the agency's expectation for efficiencies. "I wouldn't say we are 7 million b/d lower than Opec," he said. "I'd say Opec are 7m b/d above us."

Opec's forecasts only included efficiency measures already in place, but excluded even measures likely to be introduced.

Yet the IEA's NPS hardly assumes much in the way of efficiency, either. The numbers that could really scare oil producers are in WEO's 450 Scenario - a projection that includes measures to keep long-term global warming at no more than 2 degrees Celsius.

According to that scenario, oil demand in 2035 could be just 78.2m b/d, or 23.2m b/d less than the forecast in the NPS; and 9.2m b/d less than last year.

Consumers have good reason to pursue such savings, because energy prices remain too high for many import-dependent economies, making them uncompetitive, the IEA said.

Average Japanese and European countries now pay more than twice as much for electricity as their competitors in the US. Chinese firms pay about twice as much. "Lower energy prices in the US mean that it is well-placed to reap an economic advantage," said Birol, "while higher costs for energy-intensive industries in Europe and Japan are set to be a heavy burden."

Efficiency would help mitigate the damage brought by high energy costs, the agency said, but unless policies change two-thirds of the economic potential for energy efficiency would be untapped.

The agency once again took aim at fossil fuel subsidies. They amounted to $544bn globally last year, while incentivising wasteful consumption.

The beginnings of a sectoral shift are under way. The amount of energy used to produce a unit of GDP declined around the world by 1.5% last year, the IEA said, compared with an average annual decline of 0.4% in 2000-10. China's energy intensity was once four times the world's average. Now it is twice.

If those small shifts were the product of high oil prices, the trend should become more pronounced if the IEA's long-term price forecast holds. Real oil prices will reach $113/b in 2020, the agency thinks, and $128/b in 2035. 

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