The developing scandal around the International Energy Agency and peak oil

It is interesting that Australian media has not yet covered the developing scandal around the International Energy Agency (IEA) and its prognoses for future oil production that broke last week. The IEA was established by the OECD nations to advise them on energy and is regarded as the world’s highest authority on world energy needs and production. Last Monday week (November 9), in The Guardian, it was revealed by whistleblowers in the IEA (current and former employees) that the IEA’s future oil production estimates were inflated.

Apparently, the USA has been pressuring the IEA to use the data from its own “Energy Information Agency” (EIA), the reliability of which has been questioned in the past. According to The Guardian article:

A second senior IEA source, who has now left but was also unwilling to give his name, said a key rule at the organisation was that it was "imperative not to anger the Americans" but the fact was that there was not as much oil in the world as had been admitted. "We have [already] entered the 'peak oil' zone. I think that the situation is really bad," he added.

Coincidentally (?) on the same day, the research group of Professor Aleklett (president of the international arm of the Association for the Study of Peak Oil and Gas) of Uppsala University, Sweden, published a peer-reviewed paper in the scientific journal Energy Bulletin that uses the IEA’s own data to show that it is comprehensively wrong in its estimates of future oil production.

The IEA’s error has been to radically overestimate the rate of future oil production from undeveloped oilfields and fields yet to be discovered. They also overestimated the amount of “natural gas liquids” associated with future natural gas production and have overestimated the rate at which oil can be produced from unconventional sources (such as the Canadian tar sands).

Even when applying extremely optimistic estimates for future oil production rates, the Uppsala research group finds that production in 2030 will be 25 per cent lower than the IEA predicts. In fact, their revision of the oil data shows that the peak of oil production was last year! For this reason, the Uppsala research group’s paper is titled, “The Peak of the Oil Age - analysing the world oil production Reference Scenario in World Energy Outlook 2008” (PDF 823KB).

One day later the IEA published the most recent update of its annual report, World Energy Outlook 2009. Its estimates of future oil production are little changed from its 2008 estimates.

Commenting on the whistleblower allegations Professor Aleklett stated that already a number of years ago:

I had communicated to Sweden’s delegate at the IEA that Sweden should leave the IEA since it was deceiving the world and this would have serious consequences globally. I also asked how they could approve of something like the World Energy Outlook that was so in error.

Now the Swedish delegate to the IEA has commented on the allegations of the IEA’s faulty prognoses in a manner that supports everything Aleklett (and his research group) have asserted:

Urban Bäckström at the Swedish Energy Authority who is Sweden’s representative at the IEA, says that the IEA’s prognoses for oil resources are probably correct. But it will be difficult to increase production as much as the IEA foresees.

This is completely in line with the “Peak of the Oil Age” paper in which Aleklett’s research group accepts the IEA’s estimates for the oil reserves that exist and that will be found but disagrees with how fast they can be extracted.

The full impact of these developments has not yet been appreciated by the world economic community. For many years (up until its 2008 report) the IEA has predicted future world oil output based on what would be required to support future predicted economic growth. This is putting the cart before the horse since it is energy availability that constrains economic activity not the other way around.

Fortunately for the IEA in the past it has always been possible to increase oil production in line with a growing economy. However, this easy relationship began to break down in 2005 when conventional oil production plateaued and now, after the financial crash of 2008, oil production has begun to fall. (In fact, it is possible to make a very strong argument (PDF 637KB) that it was the high oil prices of 2008 - due to the supply/demand imbalance - that pricked the housing debt bubble in the USA and so triggered the current financial crisis.)

The corollary of the IEA’s assumption that oil (energy) use must increase in line with economic growth is that, if energy availability is now in decline, then economic activity must decline with it - in other words, the world will never again attain the economic activity seen in 2008 and we can look forward to decades of economic contraction if we cannot find alternative energy sources to substitute for the dwindling energy from oil. This will probably be manifested as oil price spikes killing economic activity as governments try to stimulate economies out of recession - every time an economy starts to grow it will increase oil demand beyond supply which will force up prices and crush the economic “green shoots”.

If the International Energy Agency had previously been honest about the world’s energy future then we might have been able to lessen the impact of the serious energy crisis into which we are now heading. As it is we are completely unprepared for it. As Aleklett put it:

What these faulty analyses will cost the world in the future is difficult to estimate but all the crisis packages that are currently in place are presumably a smaller part of that cost.

It is tragically apparent that we can no longer trust the pronouncements of the high authorities to whom we usually turn when seeking advice on which to base decisions about our future (such as investment decisions). Whether it is the IEA, EIA, reserve banks or other purportedly politically independent bodies, it seems they are not telling us the truth but, rather, what they want us to believe in order to maintain faith in an economic system whose future is now in serious doubt.