It's official: peak oil is inevitable

The International Energy Agency (IEA) last week launched its eagerly awaited World Energy Outlook 2010 at the Hotel Crowne Plaza Hotel in London. At the press conference, Nobuo Tanaka, executive director of the IEA, began by saying that "recent events have cast an veil of uncertainty over our energy future. In the wake of recession, the pace of economic recovery certainly promises to have a major impact on energy markets over the next few years."

He highlighted the importance of government actions to energy security and climate change and explained that while considerable progress has been made in the past 12 months in terms of reducing fossil fuel subsidies and the promotion of low carbon technologies (partly due to commitments made by Copenhagen), such policies are not binding.

Mr Tanaka went on to say that the new edition of the WEO marks a departure from previous efforts, in that it makes projections not just based on current policies (the so-called business-as-usual scenario), but also on likely policy developments (the new policies scenario), as well as the 450ppm scenario in which global warming is kept below 2˚C, a result that is now "very very difficult" to obtain. In fact, the WEO 2010 indicates that thanks in part to the collective failure of Copenhagen, the cost of achieving this goal has increased by US$1tn, since the publication of the WEO2009.

The IEA states in no uncertain time that Peak Oil is inevitable, but the timing of the peak will be determined by a combination of government policy and the strength of demand in addition to the more commonly discussed issue of resource constraints. It sees crude oil output hitting an "undulating plateau of around 68-69mbpd by 2020", while total oil production including unconventional oil and natural gas liquids is expected to peak at around 96mbpd after 2035, under the "new policies scenario".

The IEA appears to shy away from the wider implications of this shift, such as the potential for the much higher costs associated with unconventional oil production to reduce the amount of net energy represented by oil output, which could actually fall despite an apparent increase in volumes and act as a brake on the world economy. It cautions that "if governments do nothing or little more than at present, then demand will continue to increase, supply costs will rise, the economic burden of oil use will grow, vulnerability to supply disruptions will increase and the global environment will suffer serious damage".

Production from existing fields is expected to dwindle to 16mbpd by the end of the forecast period and Iraq is anticipated to overtake Iran in terms of oil output within the next 5-6 years. Dr Birol, Chief Economist of the IEA, made the point that rapid growth in the Iraqi oil sector, the oil market could encounter "major challenges". The IEA also sees Canadian oil sands being profitable under all of its scenarios, an intriguing proposition, given the collective lengths required to limit CO2 emissions. Moreover, OPEC's share of global oil output is expected to rise to 52%, strengthening the cartel's control of the market going forward. The IEA also believes that if OPEC continues production at current levels in the medium-term, the market will be well supplied almost to the end of 2011.

One of the underlying assumptions of the WEO2010 is that global economic growth will average around 3-4% a year, with the vast majority coming from developing nations, particularly China. According to Dr Birol, Chinese energy policy will be one of the most important factors determining the future trajectory of the energy markets, but he took care to note that while Chinese per capita energy consumption is expected to double between now and 2035, by the end of that period it will still only be two-thirds of a typical citizen in the OECD.

He explained that Chinese oil consumption is expected to rise by around 7mpd by 2035 and that concerns over energy security will transform it into a world leader in low-carbon technologies. Dr Birol said that there could be dramatic implications for manufacturing in Europe and the USA if such policies result in China capturing the electric/hybrid vehicle market.

The IEA identifies the transport sector as the leading driver behind oil demand and expects the global vehicle fleet to increase from 800m cars to 1.6bn by 2035, with Chinese car ownership increasing 10-fold over this period to around 350m. China has also significantly reduced its energy subsidies in recent years, a trend that the IEA hopes will be universally adopted.

If the world fails to act collectively on this issue, the IEA expects total annual fossil fuel subsidies to amount to US$600bn by 2015. It feels that this issue needs to be tackled if demand is to be reined in and energy efficiency increased. Later on in the session, Dr Birol explained that when all of China's energy policies are analysed together, their combined impact is greater than the country's 40-45% improvement in carbon intensity target.

Dr Birol raised the question as to whether the world will see "a golden age for gas", before mentioning that the IEA envisages a 44% increase in demand, chiefly driven by China and the Middle East. Unconventional gas is expected to make up 35% of total output, with the current gas glut expected to "peak soon, but may be with us for 10 years." Unused capacity is expected to double to 150bcm.

The high supply situation will in the IEA's opinion drive gas importers to negotiate future long-term contracts away from oil price indexation, particularly in Europe. Dr Birol also made the point that cheap natural gas will be bad for renewables, coal, CCS and nuclear power and that the IEA is already seeing an impact in some countries, including the USA.