The IEA confirms what I’ve been saying all along: There isn’t enough oil supply on the planet to meet demand. And that’s not about to change anytime soon. A new oil supply crunch looms as oil companies have put the brakes on sorely needed investment to increase oil production to satisfy future demand and to offset the accelerating declines of today’s aging fields. This at a time when opportunities to invest are more constrained than ever. Bullish for oil? You bet. My longer-term target of $200 oil remains intact. 
 
Energy agency warns of supply crunch

November 12, 2008, LONDON (AP) — The International Energy Agency on Wednesday called for massive investment in producing more oil to prevent a supply squeeze in coming years, saying energy demand will rise 1.6 percent a year on average between 2006 and 2030.

The IEA’s base scenario for energy demand has fallen due to the global economic slowdown and higher oil prices, but the agency stressed that a delay in spending on new projects due to the credit crisis could lead to a “supply crunch that could choke economic recovery.”

But project delays — and cancellations in some cases — is precisely what’s happening as producers and refiners, large and small, adjust to oil prices that have fallen more than 60 percent since peaking above $147 in July.

Many companies have slashed their capital spending budgets for at least the coming year. Just last week, ConocoPhillips and the state-run Saudi Arabian Oil Co. said they’ve postponed construction of a multibillion-dollar refinery in Saudi Arabia because of the uncertain economy.

The IEA expects demand for oil to rise from 85 million barrels per day currently to 106 million barrels per day in 2030 — 10 million barrels per day less than projected last year.

China and India continue to be the main drivers, accounting for more than half of incremental energy demand to 2030, but the Middle East, a longtime supplier, also emerges as a major new demand center.

The agency said that these trends call for energy supply investment of $26.3 trillion to 2030, or more than $1 trillion a year, but it noted that tight credit conditions could delay spending.

“While the situation facing the world is critical, it is vital we keep our eye on the medium to long term target of a sustainable energy future,” Nobuo Tanaka, the Paris-based agency’s executive director, told reporters at the release of its annual World Energy Outlook report in London.

The IEA is a policy advisor to 28 member countries, mostly industrialized oil consumers.

Last year, Platts, the energy information arm of McGraw-Hill Cos., said companies that produce, refine and transport oil and natural gas will need as much as $21.4 trillion in capital expenditures through 2030 to meet the world’s energy demands.

However, Platts also noted the industry already was falling behind the spending curve, in part from limited access to new potential reserves for the major multinational oil companies.

The Organization of the Petroleum Exporting Countries, which pumps around 40 percent of the world’s oil, cut output by 1.5 million barrels per day from Nov. 1 to counter a recent fall in the price of crude from a high of $147 in July to under $59 on Wednesday.

OPEC has also warned that crucial downstream investment — in refining and distribution — will be curtailed if the oil price is not maintained at a reasonable level.

Those curtailments are already happening. In addition to the postponement by ConocoPhillips and Saudi Aramco, North American refining giant Valero Energy Corp. has said it will curtail capital spending for the rest of 2008 and 2009. Also, Marathon Oil Co. said it’s delayed expansion of a gasoline refinery in Detroit “due to current market conditions.”

The IEA has nearly doubled its forecast for the price of oil over the next twenty years, because of rising demand in the developing world as well as surging costs of production as oil needs to be sourced from more expensive offshore fields and state-run companies.

It hiked its forecast for the price of a barrel of oil in 2030 to just over US$200 in nominal terms, compared to its forecast last year of US$108 a barrel. Measured in constant dollars, it pegs oil at US$120 a barrel in 2030, up from last year’s forecast of US$62.

Over 2008 to 2015, it predicts the price to average $100.

Tanaka said that “while market imbalances will feed instability, the era of cheap oil is over.” He said that a fundamental change was under way in the upstream oil and gas industry — exploration and extraction — with international oil companies facing dwindling opportunities to increase their reserves and production.

In contrast, national oil companies are expected to account for 80 percent of the increase in both oil and gas production to 2030.

However, Tanaka said it was “far from certain” those companies would be willing to make the necessary investment themselves or to attract sufficient capital to keep up the necessary pace of investment.”

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