New IEA Report: The Next Oil Crisis is Coming

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New IEA Report: The Next Oil Crisis is Coming

From EnergyBulletin.net

The IEA warns of shortages - "The next oil crisis is coming"

by Michael Kläsgen

A shortage of oil could trigger another global recession around 2013 – says the IEA. By 2010 the price will reach new highs.

The IEA in Paris is warning of a new, much more severe global
economic crisis around 2013. The reason is that investments in oil from
new projects are being cancelled by large oil companies. If demand
starts increasing in 2010, the oil price could explode, fire up
inflation and put global growth at risk.

"We are concerned, that oil companies are reducing their investment
levels. When demand returns a supply shortage could appear. We are even
predicting that this shortage could occur in 2013." Said Nobuo Tanaka,
head of the IEA in an interview with Sueddeutsche Zeitung.

Oil reserves declining markedly

He is alarmed, because he has data that shows that the global oil
supply capacity is declining and that oil reserves will likely be
markedly reduced by 2013. The stronger oil demand will be in a recovery
starting in 2010, especially in the US, China and India, the sooner the
shortage will appear and strangle global growth.

According to the IEA, the oil price could then exceed the records
achieved in the summer of 2008 and reach $200 per barrel. "We could be
steering into a new crisis which could be greater than the current
crisis", said Mr. Tanaka. "That is why we are warning oil companies to
invest", said Mr. Tanaka. Despite billions in profits in the prior
year, oil companies are cancelling their investments because at the
current price of $40, they are barely profitable.

The investment levels are already down 25% from a year ago. The OPEC
countries are reducing production, because they do not see sufficient
demand. Of 130 large oil projects, 35 have been frozen by February,
said OPEC general secretary Abdullah al-Badri.

The investments however, are necessary to meet demand when it starts
picking up again. This is not a matter of oil running out, but IEA
studies prove that the oil produced from 580 of the largest 800 fields
is declining.

The CEO of the French oil company Total, Christophe de Margerie, is
even predicting that global production will never exceed 89 million
barrels per day, because the peak has passed and oil can only be
extracted with ever increasing technical inputs.

Global demand is increasing

The IEA however is predicting markedly higher global demand. Almost
half of the demand must be met by new fields, because existing reserves
are declining more and more. Tanaka is calling on the OECD countries,
the 30 western industrialised economies for which he speaks, to
radically change in their energy policies.

Unfortunately, he has found that because of the global economic
crisis, investments in renewable energy and nuclear power are
declining. If additional measures are not undertaken however against
global warming, and the CO2 emissions continue their step upward
trajectory, this will lead to warming of six degrees centigrade by the
end of the century. "This would be a disaster", said Tanaka. Then the
northern German city of Hanover would be a warm as Marrakech today.

The IEA is recommending increased energy efficiency. Governments
should induce consumers to use energy as focused as possible. Globally,
he is recommending an energy mix with 50% renewables such as wind,
hydro and solar. A quarter would have to come from nuclear power. A
further quarter would have to come from sources where CO2 would have to
be sequestered underground.

Because this will be difficult to achieve, the IEA believes that
there will be an increased dependency on oil. "It is true that the
weight of OPEC will increase, even if we reduce our oil consumption.
And this is the central question for our energy security."

Mr. Tanaka stated his intention to appeal to the governments. "When
the heads of state of the leading industrialised economies meet, we
will be warning them about the consequences of lacking investment in
the energy sector."

 

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Re: New IEA Report: The Next Oil Crisis is Coming

Oooh Sh*t !!!  How in the world am I going to prepare for this too? Thanks for the post.

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Re: New IEA Report: The Next Oil Crisis is Coming

 Ryan Avent adressed this yesterday in his blog: http://www.ryanavent.com/blog/?p=1981

There are several implications here. One is that oil prices are
extremely sensitive to economic growth — the more so since low recent
prices and the credit crunch
served to disrupt a lot of exploration. As the global economy recovers,
so too will oil prices, and fast. That increase is going to cut the
legs out from under a recovery; a rise in oil prices is like a tax
increase, which is contractionary. And if we nonetheless manage to grow
through the rise, the increase in prices and oil demand will expand the
trade deficit once more.


I don’t think it’s that hard to work around these issues. We could
pass a substantial gas tax increase now to take effect in two or three
years. In expectation of the increase, consumers would purchase more
fuel efficient automobiles, potentially boosting auto sales and
reducing vulnerability to high oil prices. And I’m sure I don’t even
need to say that a program of rapid expansion of transit and passenger
and freight rail capacity, funded immediately by deficit spending and
after recovery by gas and congestion taxes, would kill multiple birds
with one stone — providing stimulus, facilitating structural shifts,
and reducing exposure to rising oil prices.


Rising oil is a threat. It will slow or kill recovery, and depending
on how the Fed reacts it could generate uncomfortably high levels of
inflation. And it’s not like getting off of oil is in anyway counter to
long-term goals; climate change perpetually looms in the background.
Let’s see some attention paid to this.

 

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Re: New IEA Report: The Next Oil Crisis is Coming
Chris Kresser wrote:

(From the article) 

Despite billions in profits in the prior year, oil companies are cancelling their investments because at the current price of $40, they are barely profitable.

This point being made both infuriates me and makes me question the fundamental assumption that free-market capitalism is the best way to run economies. How can these companies be so shortsighted?? It's actions like this that make me start wanting to see conspiracies and hidden agendas. Grrrr. I'm very grumpy today. I think I need to go peek under my cold frames and pat some bok choi and spinach till I feel better...
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Re: New IEA Report: The Next Oil Crisis is Coming

When your paramount principle is the dollar over the commonweal, this is the sort of behavior we get.  Grrr indeed...

Viva -- Sager 

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Re: New IEA Report: The Next Oil Crisis is Coming
Alex Szczech wrote:


I don’t think it’s that hard to work around these issues. We could
pass a substantial gas tax increase now to take effect in two or three
years. In expectation of the increase, consumers would purchase more
fuel efficient automobiles, potentially boosting auto sales and
reducing vulnerability to high oil prices. And I’m sure I don’t even
need to say that a program of rapid expansion of transit and passenger
and freight rail capacity, funded immediately by deficit spending and
after recovery by gas and congestion taxes, would kill multiple birds
with one stone — providing stimulus, facilitating structural shifts,
and reducing exposure to rising oil prices.

High oil prices would have a system-wide effect on our economy.  It's not just about gas prices.  Nearly every product we make and transport depends on oil.

The "recovery" that is mentioned is far from a certainty.

I completely agree that rapid expansion of passeger and freight rail capacity is exactly what we should be doing.  But it's not what we're doing.  A lot would have to change, apparently, for us to move in that direction.  Maybe $250 oil would do it.

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Re: New IEA Report: The Next Oil Crisis is Coming

Funny how we do can do things differently......  we prepared for this FIRST!!

 ALSO, just got this in my email this morning:

 

BP, Total Tell Suppliers to Cut Costs Up to 40% Amid $50 Oil

Mike 

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Re: New IEA Report: The Next Oil Crisis is Coming

DTM,

How did you prepare for this?

Are you completely off the grid with a solar/hydro/wind hybrid power system? Is your home of a passive solar design?

Do you grow 90% of your own food? Do you grow your own green manures for compost/fertilizer? Have you established a self sustaining food forrest?

Have you established a micro-livestock ranching operation?

Do you drive electric vehicles or have some other means of transportation?

Have you stored sufficient quantities of petroleum-based necessities for daily life and/or found replacements for them?

Have you learned all the necessary skills required for a self-reliant lifestyle?

Have you invested appropriately for the coming oil shock? 

To be able to survive without oil, or with very expensive oil, is a completely life-changing transformation. How does one do this without massive amounts of financial and time investment?

Realistically, even if I could work on this transformation full time, and had significant funds to invest, I see it taking a decade of hard work to establish some semi-comfortable, self-reliant lifestyle thats independent of oil.

How have you done this? Please, I need your guidance and advice here? 

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Re: New IEA Report: The Next Oil Crisis is Coming

DTM,

I forgot to mention, I tried to link to your personal blog, but I keep getting a Error 404 (page not found). I tried a couple months back, and had the same problem. The problem might be with my connection to the server, but I thought I would inquire about it. Thanks. 

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Re: New IEA Report: The Next Oil Crisis is Coming

Off the grid is a totally American expression....  which, to be honest, I find annoying.  I am in fact ON the grid, with a grid tied 1.3kW solar array.  The house is state of the art energy efficient passive solar design.  Our last quarterly power bill was $5.65.

I don't drive, I don't need to drive.  THAT is what I meant when I said I prepared for PO first.  I really did not think the economy would tank this early in fact...

So to prepare for PO you need to rearrange your transport needs, and you need to grow your own food and I did this by ensuring everything I need (I mean NEED, not WANT!) is right here.  The tax on my car ran out in June 2007, and it hasn't moved since.  My wife, who works as a nurse twice a week has to have a car because of the weird but typical hours nurses work.  Her car is a 20 year old 1.6L compact that regularly does 40MPG because it's driven slowly on high octane unleaded and hard tyres.  If it weren't for the fact she has a Ceramics habit and is studying full time, she could probably stop working the job she now has (15 miles away) and work for the local doctor once a week where she can walk to.

We don't grow 90% of our food yet, but we are working on it.  Our goats should kid next month, and so we will soon have all the milk we need to make cheese and yogurt..... haven't yet discovered whether making butter from goats' milk is possible.  We have ducks chickens and guinea fowls too, and they should start breeding soon as well to keep us in some meat....  we are mostly vegetarian.

These days the only things we buy in supermarkets are butter cheese and yogurt, coffee (working on that too!) and tea, though we can have home grown herbal teas.  Because our house is still not finished, we are also still buying materials, mainly floor tiles at the moment.

We are 100% water self sufficient, and if we REALLY wanted to could in fact make money from the solar panels by selling to the grid...  but that would entail giving up this site and I'm not ready for that yet!

My blog works, I just tested it..  there's more info there.

Mike 

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Re: New IEA Report: The Next Oil Crisis is Coming

I forgot to mention why I am not the least bit interested in electric cars.  To start with, we do not have any money to buy one, and we sure as hell are NOT going to go into debt to do so!

Then, recharging an electric car off our panels would be really really tiresome.....  Mitsubishi have just announced here in Australia that they will release their electric micro iMiEV car next year.  Their data says it takes 21 kWhrs for a recharge and a range of 100 miles.

That's just a tad over 5 days worth of solar generation here....  and I am not giving up running all the stuff that's in the house just to charge a car up!  I ride a high quality carbon fiber bicycle, and if need be I can do 40 mile return trips on it....  even at 57!

Storing petroleum based fuels is a silly idea, apart from anything else fuel DOES have a shelf life.....  it may be more than 12 months, but it does not last forever.

Investment?  We own this place outright!  Don't need investments...  we have everything we want right here...  and I don't have to work (as in a job) to own it all.

How long it would take you to switch to a sustainable lifestyle entirely depends on how you go about it, and how much you are willing to rough it or compromise.

We bought this land six years ago.  But we could have built a smaller house and be finished now,  We could have camped on the land instead of continuing to rent in Brisbane while I built...  there are a myriad ways to do this, it's up to you to plan how to do it.  I guess it was also lucky (I mean good planning actually) that I retrained myself a long time ago (like mid 90s) to learn about renewable energy and energy efficiency.  It just occured to me the other day that should there be a serious crunch, we would really only need power to pump water to the taps.... the shower in particular I think my wife would insist on!  All I'd need to do that is a 48V DC pump.  Everything else, including refrigeration we could just about do without even in this hot climate because we harvest our food 'just in time'.  Milk will last 24hrs unrefrigerated, we could eat a whole duck or chicken at one sitting (or two) if we had no fridge...

Doing without TV and computer I'm sure we would quickly learn to do, and even lights too.  All you'd need is a couple of candles, on a full moon this house lights up like you would not believe with all the glass facing the equator.

Mike,  

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and this just turned up in our MSM

Enjoy the cheap petrol, while it lasts

April 10, 2009 - 9:50PM

With demand on the
rise, existing wells drying up and a dearth of big discoveries, the oil
price is only headed in one direction.

IN
July 2008, the oil price hit a record high of $US147 a barrel. In its
journey from the lows of 1998 to the highs of last year, many reasons
were put forward for its ascent. Explanations included a so-called "war
premium" , "a terrorist premium", hurricanes and evil speculators - the
list of things and people to blame for the rise in oil prices was long.

As the price rose, calls were made by political
leaders and interest groups for oil producers to lift production and
for a cut in taxes on oil and petroleum. Accusations of price gouging
and profiteering by oil companies and producers soon emerged.

Under
the glare of TV cameras, OPEC promised to lift oil production and bring
prices down. Yet the price continued its march upward and production
rose only marginally.

The key point that appears to
have been missed was that in the decade from 1998, demand grew about 16
million barrels a day while supply struggled to keep pace, particularly
during the later years.

Now that the oil price has
collapsed from $US147 to the $US40-$US50 region and it's off the front
pages, it is yesterday's story. But is it really an old story. Have we
been told the true state of play?

According to
most mainstream news reports and even views presented by the investment
community, oil was in a bubble and the global financial crisis has
plunged the world into recession, which is leading to demand
destruction for oil and hence the low oil prices.

However,
in all the stories and debates that have taken place during the rise in
oil price and its subsequent fall, very little attention has been paid
to what is actually going on with supply.

What
is also not well understood is that the oil price is set in what is
called the "paper" or futures market, predominately in New York. The
oil price is not set in the actual "physical" market as commonly
perceived.

The players in the futures market do
not all accept delivery for the contracts they trade. In fact, for a
vast amount of trading that occurs, it is actually not done by oil
companies or producers at all, and for a large portion of the contracts
outstanding no actual oil delivery occurs. In effect, the physical
barrels mirror the paper barrels and not the other way around.

In
recent years, new investors such as specialised investment funds,
exchange traded funds and hedge funds and oil speculators who play via
the futures market have emerged. None of these are going to take oil
delivery at contract expiry, either.

For the most
part, it is a price-taking, not price-making, market for the producer.
Rarely is this reported and this leads to a misunderstanding by the public as to the exact price setting mechanism for oil and the prices they pay at the petrol pump.

While
ultimately fundamentals will win out, a big disconnect can occur
between what occurs in the so-called paper market and what the reality
is in the physical market. Markets are not perfect by any means. The
credit crisis is a case in point.

It is in knowing these facts that we can begin to understand the basis of the wild gyrations in oil price.

To
be sure, the futures market does play an important role. As with
broader financial markets, there has been heavy selling in the oil
market as various financial players seek to raise cash and deleverage
their positions. Everything gets sold in the scramble to raise cash to
pay off debts and shore up their balance sheets. This scramble would
not necessarily result in prices that reflect the physical market or
the fundamentals.

As we look at
the numbers the International Energy Agency (IEA) publishes on oil
production, a disturbing picture begins to emerge: conventional world
oil production peaked about mid-2005 and has been on a slow decline
since. Demand is being met by non-conventional oil sources.

Non-conventional
oil is derived from activities such as oil sands and bio-oils. This
production brings the supply of world oil productions up to about 86
million barrels a day, sufficient to meet current demand. Conventional
crude production accounts for about 75 million barrels a day.
Non-conventional sources are more expensive and require oil prices
to be upward of $US30-$US40 to be viable. In fact, according to the
IEA, to significantly expand non-conventional oil production to meet demand growth, prices would need to be well above current levels to make any sense.

Non-conventional
sources are expensive compared to cheap Middle Eastern oil. Even deep
water and ultra-deep water oil are expensive compared to Middle Eastern
oil and still require oil prices well above current levels to be viable.

In
the conventional oil space, Saudi Arabia, for so long the world's
biggest oil producer, could potentially lose its leadership in
conventional oil production, with Russia almost at level pegging
according to 2007-08 data. In terms of overall energy production Russia
is now the world's biggest producer.

Moreover, Saudi
Arabia is resorting to massive water injections into some of its major
wells to maintain production. It is difficult to know what are their
true reserves and production capability.

According
to IEA data, it appears Saudi Arabia's production peaked in 2005; it
has not been able to surpass that year's production and has produced
less and less oil in subsequent years, despite the "increased
production rhetoric" that it maintains.

Unbeknown to
most people, oil field discoveries peaked during the 1960s and 1970s.
During the 2000s, there have been relatively few new major field
discoveries - about 70 so far, versus more than 1200 during the 1960s
and '70s.

In the IEA World Energy Outlook, it is
estimated that the oil well decline rate is running at about 6.7 per
cent. It is estimated that natural decline rates (without any capital
spending to maximise production) would run at 9 per cent.

There
are about 70,000 oil fields in production, with about 20 super-giant
fields that account for more than 25 per cent of world production. Most
of these fields are at least half a century old and well past their
peak production years. For example, the top three fields of recent
times in terms of reserves - Ghawar (Saudi Arabia), Cantarell (Mexico)
and Burgan (Kuwait) - are all in decline.

The
world is excessively reliant on oil production from "old" fields and
has resulted in an implied belief of "cheap" oil continuing to flow.

Oil
production is expected to decline at a significant rate from here on.
To meet demand this decreased production output must be replaced and in
fact added to, such that demand growth can be met in years to come.

The
credit crisis has seen funds dry up for oil exploration and the
commissioning of new production. Numerous projects globally have been
shelved or put on hold. Many non-conventional sources of oil
become uneconomic at $US30-$US40 a barrel and cannot be sustained
long-term if prices remain at, or drop below, these levels. The key
decision variable will be sustainable long-term price not short-term
price blips.

In fact, a January press release by
Schlumberger, a leading oil and oil services company, stated: "At
current prices most of the new categories of hydrocarbon resources are
not economic to develop."

So what does all this
mean? While the focus has been on the demand side, on the effects of
the credit crisis and so on, the real story is what is going on the
supply side and the supply destruction that is occurring. Despite all
the rhetoric on oil in recent years, very little has appeared in the
mainstream press to date about the seriousness of the issue. Without
the ability to meaningfully increase production, the production decline
rates are likely to exceed any demand destruction resulting from a
global recession.

Granted, there is oil in storage
and many countries have "oil reserves". However, when considering the
big picture, these reserves are by and large irrelevant.

In fact, financial markets seem to have an very unhealthy obsession with oil inventory data that comes out of the US.

Truth
be told, these numbers are only estimates based on surveys - there is
no one who walks around with a dipstick that can provide an exact
measure of oil reserves.

Either way, these
inventories would constitute at best a few months' supply. Hardly
something to pin one's hopes on. Relying on, say Iraq, to be the next
Saudi Arabia, may be a pipe dream with only marginal impact at best,
and that is if the conflict there is ever resolved.

Also,
oil-refining capacity is constrained. Very little investment has
occurred during to the 1980s, 1990s and in this decade on brand new oil
refining capacity, though efforts have occurred in recent years to meet
the increased demand for petroleum products. Yet there is still
insufficient new infrastructure to cope with a significantly higher
demand scenario and a lot of older infrastructure still needs to be
modernised. The credit crisis is putting a lot of things on hold.

In
the meantime, the world's population grows. With more than 6 billion
people on the planet, the Third World moving into the Second World and
the Second World striving to make it to the First World, all this adds
up to ongoing demand growth. Countries like China and India will
continue to grow demand despite the global slowdown.

The
real question is whether supply can grow to match. The IEA anticipates
by 2030 the global daily demand for crude will be more than 120 million
barrels. That is about 50 per cent higher than today.

Without
new investment either in oil or some alternative, it will not take long
for oil prices to begin a renewed march upwards, most possibly
exceeding their previous highs. Unfortunately most alternatives are
quite a way from being either viable or rolled out en masse, while
other alternatives such as biofuels and similar ventures use way too
much energy versus what they yield. Besides, diverting food production
into fuel production while there are people starving is a perverse use
of technology.

The state of play in the oil industry
is unsustainable and a critical situation will be reached unless
concerted proactive action is taken to address the coming crisis.
Unfortunately, if history is any guide, actions will only come once the
crisis is upon us.

Demand for oil has consistently
grown since 1890 So, unless the world population stops growing and
starts to decline, the Third World stops industrialising and the world begins to de-industrialise, it is difficult to see how demand is all of a sudden going to diminish to negate production declines from existing wells.

With
no quick end in sight to the credit crisis and many oil companies in
"survival mode", where will the oil production increase come from?
Where are the "new giant" wells to take up the slack when the "old
giants" decline?

Moreover, with uncertainty and
volatility in the oil price, will companies be prepared to invest large
sums in developing production of new discoveries when basic price
stability is lacking? Even if an oil source is found today, it still
takes considerable time, sometimes years, before any meaningful output
can be achieved.

With the collapse of the oil price
since last July, several major oil-producing countries are also sabre
rattling and threatening to cut production to force prices to what they
believe is a more "economic" level. That may create an interesting
scenario where a particular price is set in the paper market but one
cannot get it in the physical. Some of these nations are arguing that
oil should not be priced solely in US dollars but in a range of
currencies. Some are trying to lock up supplies and take them off the
market.

So, has the oil price bubble burst - as so
loudly broadcast by various investment pundits - or are we really
sitting in the calm before the storm?

What will happen once economic activity picks up? Maybe we should enjoy the relatively low oil and petrol prices while we can.

Michael Trifunovic is an investment banker and fund manager.

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