The International Energy Agency, the industrialized countries’ energy watchdog, on Monday warned on a crude oil “supply crunch” in the next five years on the combination of strong consumption and lagging supply.

The IEA said that “oil looks extremely tight in five years time” and there are “prospects of even tighter natural gas markets at the turn of the decade.”

Although the energy watchdog is not in the business of predicting oil prices, analysts said that the IEA’s balance of supply and demand pointed to a growing risk of higher oil prices to 2012. However, an increase in refinery flexibility and capacity could help to ease the price pressures.

In summary, here is the bad, the very bad, the good news and debate:

The bad news for Western countries: oil demand is growing faster than anticipated (now at an annual pace of 2.2 per cent, when a year ago the IEA estimated a rate of 2.0 per cent), and the supply from nations outside the Organisation of the Petroleum Exporting Countries will increase by 1.0 per cent a year, or just by half the consumption growth.

The very bad news for Western countries: The widening gap between rising consumption and lagging non-Opec supply will force Opec, the oil cartel, to sharply increase its production in the next five years. So expect more reliance from countries such as Saudi Arabia, Irak, Iran, Venezuela or Nigeria.

The good news for Opec: The IEA estimates Opec would have to supply about 36.2m b/d in 2012, up from today’s 31.3m b/d. That would reduce the oil cartel spare capacity to a “minimal level” of 1.6 per cent of global demand, down from 2.0 per cent in 2007.

Any good news for Western countries? Yes. Refinery flexibility is increasing and that should help to reduce some of the premium into today’s high oil, petrol and heating oil prices.

The debate: The IEA talks openly about the peak oil concept (well, "plateau", rather than peak in the Paris-based body jargon). The IEA said in its report: “The concept of peak oil production and its timing are emotive subjects which raise intense debate. Much rests on the definition of which segment of global oil production is deemed to be at or approaching peak. Certainly our forecast suggests that the non-OPEC, conventional crude component of global production appears, for now, to have reached an effective plateau, rather than a peak.

And it adds: “Peak or plateau production is frequently taken as shorthand or impending resource exhaustion. While hydrocarbon resources are finite, nonetheless issues of access to reserves, prevailing investment regime and availability of upstream infrastructure and capital seem greater barriers to medium-term growth than limits to the resource base itself.”

July 10th, 2007 in Oil, Opec | Permalink