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Thursday, December 14, 2017

Oil supply shortage – crying wolf again, or not?

Ever since the oil crisis in 1973, when the world feared that it was short of oil, there have regularly been "specialists" expressing concern that we are running out of oil. However, all the time oil production has increased and conveying such alarms has become akin to crying wolf. 

However, we read in the Financial Times today that the head of the International Energy Agency (IEA), Claude Mandil, has issued an energy investment warning. Investment in new capacity by oil-producing nations and energy companies is too small to meet future growth in demand, the developed world's energy watchdog warned on Tuesday. Mandil said that even though energy prices were near record levels, the world was not investing enough in oil and gas production, refining, power generation and transmission.  

Mandil's comments, at the IEA's biennial ministerial meeting, highlight growing concern about energy industry strategies. Global investment in the sector remained below the IEA's 2003 estimate of the USD 16 trillion needed by 2030 to meet projected demand. "We are not on track," he said. 

Within the Organisation of Petroleum Exporting Countries, which holds two-thirds of global oil reserves, exploration and development have risen in the past year. But that has not prevented OPEC's spare production capacity falling to its lowest for about 30 years. 

We also read in Tanker World, quoting the Sunday Herald, that Saudi oil reserves may be overstated. Matt Simmons, one of United States President Bush's energy advisers, was at a conference in Edinburgh, Scotland, spelling out the harsh facts on Saudi oil production. If his information proves to be true, it may have severe repercussions for the global economy.  

Simmons's belief is that Saudi has been overstating its oil reserves for years and that its biggest oil fields are in decline. And he believes Saudi Arabia will struggle to live up to its promise to increase its daily output from around 10 to 12 million barrels per day (mbd) by 2009, and later 15 mbd to meet global demand.  

Simmons visited Saudi Arabia in 2003 as part of a United States energy delegation. When he left the country six days later, he was convinced that the rosy picture the Saudis had painted of their key strategic resource was deeply flawed. Simmons is now about to publish a book entitled "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy", in which he outlines the fruits of his painstaking research into the true extent of Saudi oil reserves.  

Simmons studied some 200 petroleum engineering reports on the biggest oil fields in Saudi Arabia, a nation which boasts 25% of world reserves. In the 1980s, Middle East reserves jumped by some 43% in three years, despite there being no major new finds. Oil nations and oil companies alike have a motive for exaggerating reserves. Shell admitted last year that it had overstated reserves by 20%, sending its shares crashing. Simmons claims there are other bombshells still to come.

 According to the IEA World Energy Outlook 2004, which contains projections up to 2030, inter-regional oil trade is due for a sharp increase. Global economic growth is assumed to average 3.2% per year in the period 2002-2030. The world population is assumed to expand from 6.2 billion in 2002 to over 8 billion in 2030. The average IEA crude oil import price is assumed to fall back from its current highs to USD 22 (in year 2000 dollars) in 2006, remaining flat until 2010, and then beginning to climb steadily to USD 29 in 2030. 

According to these assumptions and in this reference scenario, net inter-regional oil trade between the major production and consumption regions will reach 65 mbd in 2030 – over half of global oil production and more than twice as much as at present. This trend results from the steady growth in demand in all regions and the increasing concentration of oil production in a small number of countries.  

According to IEA the Middle East, already the biggest exporting region, will see its net exports rise from 17 mbd in 2002 to 46 mbd in 2030. Exports from Africa, Russia, and other transition economies will also continue to expand steadily in the short to medium term, but all of them will have started to decline by 2020. Caspian countries will experience the fastest growth. Despite growing exports from Venezuela, net exports from Latin America as a whole will increase only modestly until 2010 and stabilise thereafter. The increase in trade will be particularly marked after 2010, reflecting the growing share of the Middle East in world oil supply.

According to the U.S. Department of Energy's Energy Intelligence Administration (EIA) oil demand will increase from some 81.9 mbd in 2004, 91.4 mbd in 2010, 100.1 mbd in 2015, 109.9 mbd in 2020, 120.2 mbd in 2025 of which the Middle East will supply 22.1 mbd in 2004, 24.5 mbd in 2010, 32.8 mbd in 2015, 32.8 mbd in 2020, and 22.1 mbd in 2004, 38.4 mbd in 2025. The Middle East is assumed to increase its market share from 27% in 2004 to 34% in 2025. Russia will increase its share from 10% to 11% but fall back to 10%. Africa, South and Central America and the Caspian area are all assumed to increase their shares, which means that the five biggest supplying areas will increase their total share from 48% to 60%. 

Contact: Erik Ranheim