It has hitherto been assumed, not unreasonably, that the steadily intensifying pressures on global oil supply from fast rising oil demand, notably from China and India, would be alleviated by the recession. But, alarmingly, a new report from the International Energy Agency (IEA) suggests that this rather complacent assumption may not hold good even with the fall in demand due to the recession, let alone if an economic recovery put further strong pressure on global oil supply again. The most important new fact arising from the report (the first in-depth analysis of the production data from the world’s largest 500 oilfields) is that without extra investment to raise production, the annual rate of decline in these fields is now a staggering 9.1%, and even with investment, the annual rate of output decline is 6.4%. This is far higher than previously thought, and the implications not only for an economic upturn, but also for a continued recession, are stark.

The IEA is now broadly in line with others in the oil industry who say that total oil production will not reach beyond about 106 million barrels a day by 2030 (before the crunch in 2007 it reached 86 m/d). But even tis most hopeful scenario is dependent on major new investment, and investment is now being cut back because of the banking crisis. Even if the credit crunch were resolved, but the price of oil stays below $60 (it is currently $53), much of that investment will still not take place. In the absence of such investment, and if there are unexpectedly high levels of depletion in existing fields – which is the key finding of this latest IEA report – global oil prfoduction could actually fall even below the reduced level of demand created by the recession. In other words, the struggle to replace mature oilfields’ output could even offset the decline in demand growth which has give the industry a reprieve in the last year.
If on the other hand the world economy emerges early from recession, which on balance seems unlikely, and if the previous surge of energy demand were to return (i.e. there are no serious shifts towards energy conservation/efficiency or alternative energy development), then oil prices will start to rise steeply again. This will be all the more so if investment in new capacity turns out to be low during the downturn, as currently seems likely.

Bookmark to: