IEA becomes more pessimistic

The International Energy Agency’s latest Medium-Term Oil Market Report is significantly more pessimistic about global surplus oil capacity over the next half-decade.

The IEA Report (hat tip to Tim Iacono and The Oil Drum for the link) sees a tighter oil market ahead than it had been predicting just last February. The IEA’s methodology has to make an economist wince– they extrapolate demand trends, separately calculate supply prospects, and, when the two numbers aren’t equal to each other, issue a hand-wringing report like the present one.

Source: IEA.


The forecast now calls for demand growth to exceed supply, presumably putting upward pressure on prices relative to those implied by their previous forecast. The increased strain comes from a number of different sources. The IEA is now anticipating world oil demand in 2010 at 91.9 million barrels per day (mb/d), which is 0.6 mb/d higher than their February forecast– as Tim notes, a good recession could fix that problem. They also are anticipating a 0.9 mb/d smaller increase in non-OPEC crude supply and 0.8 mb/d smaller increase in OPEC crude capacity relative to their February projections. A big factor in the latter adjustments is “slippage”– projects always seem to take longer than originally anticipated. In addition, the IEA is now subtracting 0.4 mb/d in a new category for unplanned production outages– it’s a safe bet that somewhere in the world we’ll see hurricanes or other unscheduled disruptions.

The IEA report stresses that the adjustments are not coming from changes in assumptions about depletion rates, for which they continue to assume:

the implied net non-OPEC decline rate for baseload production is around 4.6% per year. This covers not only fields in decline, but also older supply which is at or approaching plateau. With net decline from OPEC assumed at 3.2% per year, this gives a global annual decline of 4%, suggesting that 3.2 mb/d of new production must be found each year just to stand still. Moreover, this net
global decline for existing assets masks fairly aggressive assumptions for parts of the OECD and for deepwater projects elsewhere. Development schedules for the latter can show rapid ramp-up followed by abrupt annual decline in a 15%-plus range.

The IEA also makes clear they are not signing on to peak oil:

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. Having attained 40 mb/d back in 2003, conventional crude supply has remained unchanged since and could do so through 2012. While significant increases are expected from the FSU, Brazil and sub-Saharan Africa, these are only sufficient to offset declines in crude supply elsewhere. Put another way, all of the growth in non-OPEC supply over 2007-2012 comes from gas liquids, extra heavy oil, biofuels (and, by 2012, 145 kb/d of coal-to-liquids from China). As overall non-OPEC liquids capacity increases, this plateau reduces the share of non-OPEC conventional crude supply from 77% in 2000, to 74% in 2006 and 67% in 2012.

While there might be a temptation to extrapolate this trend, citing a peak in conventional oil output, a degree of caution is in order. Firstly, the concept of ‘conventional’ oil changes with time, technology and economics. In the early 1970s, much offshore production was deemed unconventional, but this portion of global supply has since grown to account for 30% of the total. Evolving economies of scale and infrastructure development could do the same for GTL, oil sands and ultra-deepwater reserves in the future, shifting today’s unconventional resource into tomorrow’s conventional supply category. Moreover, rapidly-growing condensate and NGL supply is scarcely ‘non-conventional’ in a technical sense now.

We also note that for certain regions, notably the FSU and West Africa, the turn of the current decade is likely to mark a hiatus in crude supply growth. Strong growth is expected to resume here towards the middle of the next decade. Whether this will be sufficient to offset the declines expected for mature OECD crude supply, preventing overall decline for non-OPEC, is less easy to predict.

Finally, we note that focussing on non-OPEC crude alone is a rather selective way of considering the sustainability of global oil production. Peak or plateau production is frequently taken as shorthand for 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.

But conspicuous by its absence is a discussion of the production decline in Saudi Arabia. The report lists 2007 Saudi production capacity at 10.8 mb/d, but does not offer a theory as to why Saudi production is currently only 8.6 mb/d and has dropped by a million barrels a day over the last two years.

Daily Saudi Arabian crude oil production (mb/d). Data source: EIA.


So Saudi Arabia accounts for most of the 3.1 mb/d in OPEC spare capacity that IEA currently perceives. And they are assuming that Saudi capacity will increase from 10.8 mb/d to 12.6 mb/d by 2012, even as their “implied OPEC spare capacity” drops from 3.1 mb/d to 2.2 mb/d. So, as I do the math, that means they are basically assuming that actual Saudi production is going to increase by 2.7 mb/d over the next five years.

Which makes you wonder– If IEA doesn’t know or won’t say why Saudi production has been on a declining trend recently, why is it reasonable to assume that now it’s going to increase by almost 3 mb/d?

And makes you wonder all the more what’s really going on under the Arabian Desert, doesn’t it?

One more question, and then I’ll leave you alone– If IEA thinks we’ll be in trouble even if we get a nice 2.7 mb/d boost from the Saudis, what’s the forecast look like if that increase from the Kingdom never comes?

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15 thoughts on “IEA becomes more pessimistic

  1. Schloop

    oh JDH, you’ve hit the nail on the head with your last question…and it’s the question few people actually want asked…*sigh*
    and people will likely call you a Cassandra for being a realist.

  2. Theodore G. Fletcher

    Prof. Hamilton, as for your last question, you might direct your readers (again?) to the extensive work on Saudi production that Stuart Staniford and Euan Means have done and posted at The OIl Drum. Even Means, initially optimistic, tempers his hopes after that lengthy and insightful exchange.
    Best case of peer-review on an internet site, (if such a thing is possible), that I am aware of.

  3. Anarchus

    The IEA language is so bizarre it’s humorous.
    1. If you were to write a script for peak oil, this is almost exactly what it would look like, with the Saudi’s eventually “discovering” that the $100 billion of incremental capX they’re spending over the next 5+ years might be sufficient to hold production around 9 mbl/day. The IEA is in denial of the implications of their own facts.
    2. When the IEA writes that “3.2 mb/d of new [global] production must be found each year just to stand still”, they’re stating the case for Peak Oil as succinctly as it can be done, without consciously realizing it, evidently.
    3. This unsourced, gross exaggeration simply does not belong in a professional report: “Peak or plateau production is frequently taken as shorthand for impending resource exhaustion”. While the lunatic fringe of Peak Oil fanatics may be deserving of the IEA’s generalization, most believers in the theory of peak oil take the language to mean precisely what it says – that once annual production has peaked a maximum value has been cast that’s almost certainly not to be exceeded. But that says little about the actual slope of the production curve beyond the maximum.
    4. I met with the CEO of a major offshore oil service company today. Over the past few months there’s been some weakness in the U.S. onshore pressure pumping market (which is nat’l gas oriented and which this co. does not serve), and I asked if they’d seen any signs of that weakness spreading into their offshore markets. The CEO hadn’t seen any slowdown and didn’t expect too in large part because his customers (the majors) have all been using approx. $40/barrel in their economic evaluations and the IRR’s are enormous with oil in the $70s and so there’s a nice cushion.
    4a. Back in the late 1970s, the price of crude was $40 and all the majors were using $60-$80 per barrel pricing in their project analyses. And so they egregiously overinvested. Today, they’re all using $40 while the current price is $70+, so they’re EGREGIOUSLY UNDERINVESTING.
    It’s all enough to make a grown man cry, almost.

  4. jaim klein

    Cheney said (my words) that the problem was of underinvestment, that most promising areas are in the grip of State owned oil companies(Venezuela, Iran, Russia) that forbid private investment, and others in politically unstable areas (Iraq, Nigeria, Ecuador, etc.) where they will not invest. I feel the oil is there, but cannot be reached. May be I am wrong.

  5. Anarchus

    Based on all the analyses I’ve seen, the problem is that the oil that is there isn’t there in large enough quantities to overwhelm the 3.2 mb/d of new production needed each year just to offset declines of existing fields.
    Take ANWR, for example. The more optimistic projection have it peaking at around 0.8 mb/d around 10 years after it starts up. Great stuff? So even if you could wave a magic wand and brink ANWR on instantaneously in 2008, it just offsets 25% of that one year’s production decline. We’re in the position of needing 4 ANWR’s brought on-line each and every year just to stand still.
    To solve the problem we need to be finding a number of virgin super-mega fields that can peak at 2-4 mb/d, but there’s just not out there to be found, apparently. Dr. Hubbert keeps looking smarter and smarter with time . . . . . .

  6. GT

    Is there a way to post charts in the comments section using html?
    Anyway, here are two charts showing Saudi’s OPEC quota along with the main production data shown in the article above.
    I am continually amazed by the absence of any discussion of OPEC’s role in reduced Saudi production and the Kingdom’s need to meet its quota if it is to maintain its leadership position in the group.

  7. Hal

    GT, I agree that those charts throw another light on the Saudi production declines. Maybe they’re just trying to get down to the level of their quotas.
    But that still leaves the question, why is the Saudi oil production quota being lowered so fast? Are other OPEC countries seeing similar percentage reductions in their quotas? I have not heard of such declines for the other countries.
    With their leading position in OPEC, surely KSA has a great degree of influence if not outright control over their quota levels. So it may not be right to interpret the data as the Saudis having no choice but to meet quota limitations imposed on them by OPEC. Rather, we may see that KSA is lowering its own quotas in conjunction with its production levels. And that suggests that possibly the quotas are being lowered to cover an involuntary production decline, rather than production declining to match quotas.
    We don’t know enough at this point to distinguish the cases. But if KSA continues to limit production even as prices climb towards and eventually beyond record levels, it will look more and more like those who blame it on geological limitations were correct.

  8. dexev


    “and has dropped by 2 mb/d over the last two years”

    while the chart seems to show only a 2 mb/d drop.

  9. coffee

    jain: If the oil is under the ground, but we can’t get to it, does that somehow impact society less when opec decides that it thinks a 100-120 price range per barrel is what the market wants with 80mbd production?

    Sure, if all countries were opened up by Bush for Exxon to have it’s way with, 2010-2012 might start seeing some increased supply, but for how long? Maybe peak gets pushed from ~2010 to ~2020 or even 2030, but that’s still within my lifetime. All the while, such organizations as CERA don’t seem to want to acknowledge that a peak is even possible.

    Also, there is the consideration of psychology; if there’s tightness in the oil markets, we can point at other countries, and say that they’re the problem because they haven’t done their best to give us their oil for a few handfuls of glass beads. It comes off a lot better than admitting that this was known to be a likely event, but it wasn’t politically expedient to try and prepare.

    It will be similar to how CERA will continue to make claims that in 2-5 years the world will be swimming in oil, and the only reason we’re not now, is a few “above-ground” factors. I suppose using similar logic, one shouldn’t grieve for a someone who died in Iraq from friendly fire because a terrorist didn’t kill him/her.

  10. GT

    If you have read the work of Stuart Staniford on the Oil Drum, you know that this spring it became the consensus there that Saudi Arabia’s production capability was in irreversible decline.
    A projection of an 8% decline was offered. Part of the reasoning (aside from guesses about the state of Ghawar’s production) was that the Saudis (as shown by these charts) had begun cutting their production in earnest during the spring of 2006 and as early as the 4th quarter of 2005. This was long before the targeted OPEC cuts of 1.2 mbpd in November 2006 and .5 mbpd in February 2007. OPEC had begun to talk about these cuts in August and September as prices began to slide from a high of $77 to $50 in January.
    However, this ignores the fact that Saudi Arabia had been explaining all along that there was an oversupply of crude on the market, if not a glut. They also pointed to speculative factors being partially to blame for the high price. At the time these statements were largely laughed at by the usual suspects. The refrain that the “Saudis are lying” was common as it still is.
    My belief is this: that the statements and explanations of the Saudi and other OPEC ministers and the Aramco heads were entirely plausible. Their concerns were real and are borne out by the events of August through February. Prior to 2006, it had been the economic consensus that price spikes of the magnitude seen since 2003 never fail to cause recession and massive demand destruction of the type Saudi obviously doesn’t want to see. But through 2005, I think the Saudis became convinced that the world, or at least the US could withstand quite high prices.
    Ultimately, oil producers will always act only in their own interest. They are never going to produce more oil simply to show skeptical Americans or the IEA that they “can.” They are going to aim for the highest possible sustainable price. It has been shown time and again that they make more money pumping less oil (while obviously maintaining their reserves). This lesson seems to be lost on a substantial portion of the Saudi-is-in-decline crowd. A simple spreadsheet will show the magnitude of any price effects that production cuts have.
    (more on this subject in this article:
    But why did the Saudis start cutting production 6 to 12 months previous to the OPEC cuts? Because they knew that a) the “fundamentals” showed the market to be oversupplied and b) that the geopolitical effects the situation in Nigeria, tension with Iran, and the war in Lebanon were having would blow over. When the hype perpetuated by the speculators went away, the bubble would burst.
    They had already successfully tested $77. Why settle for anything less than that? They could safely send out signals that they were defending $60. My guess is that they are aiming for $90. But there was no way $50 was going to fly.
    But they had a problem. OPEC works as a group (in theory, cheating is another issue). For a number of years critics have opined that the cartel has no effective power. I don’t believe this. I sometimes ask myself why a country like Angola would join the group when it will likely result in limits placed on their production at some point. Besides, the Saudis have as much incentive to have the others share the burden of any cuts as the others have for a floor being put under prices.
    The problem was that if cuts were necessary, Saudi Arabia was overproducing by 500,000 bpd over its official quota. They would have no credibility trying to convince the others to cut with this being the case. So they eliminated the excess 500,000 barrels, dropping from 9.6 to about (depending on whether you accept the IEA or EIA’s numbers on this, see 2nd chart) 9.1 mbpd (their quota) by September. When OPEC met to discuss cuts they were in a credible leadership position.
    Their current production is at the exact level of their official OPEC quota minus the two targeted cuts. It is also exactly 32.5% of the total OPEC quota for the OPEC-10. The Saudis have always had a 32.5% share. I can’t find my spreadsheet on these numbers, but I think the other 9 countries have long-term shares based on their supposed reserves in similar fashion. They all have a record of over- or under-production. Compliance with the two targeted cuts is also only about 60% – except for Saudi, of course.
    You can see the complete history of OPEC quotas here:
    Be careful when checking against actual production levels. OPEC quotas do not include anything except pure crude oil. Condensate does not count. So you need to use either IEA data or table t12 from the EIA- under this heading
    OPEC Countries Crude Oil Excluding Lease Condensate
    Excel file:
    They have maintained their current production level of exactly 8.6 mbpd (down 1 mbpd, not 2) for 5 months now. I expect this to remain the case until at least September when OPEC meets next, making it 8 months. But I am not forecasting and I won’t “bet” on it. I don’t claim to know what the situation in Saudi Arabia is, unlike those declaring geological decline. I’m simply looking at freely available data.
    My personal belief is that it will take another story or theory along conspiratorial lines to explain Saudi production over the last 2 years in light of this data. I think my explanation is simple and obvious and is backed up by not only the data but a preponderance of stories in the oil/energy-world press.
    We haven’t heard from Stuart Staniford on this subject for some time. Not since it has become apparent that Saudi’s production declines/reductions have stopped. We’ll have to see what he says. We will also have to wait to see how production actually progresses from here. Time will tell. In the meantime, those at the Oil Drum have switched to a “Saudi needs to increase their production soon to ‘prove’ something to the world.”
    I wouldn’t hold my breath. If I were to guess, if prices rise from here, first, the other OPEC members will start to cheat, alleviating some of the pressure. Next, I wouldn’t expect Saudi Arabia to start increasing production in their “swing” role until oil ran above $90 or even $100 for three months. That would be $4 gasoline. I think everybody wants to know what changes $4 gas will bring to the US. Barring any signs of impending global/US economic disaster, or some disaster like a war. Even if a Gulf coast hurricane caused significant damage, I wouldn?t expect the Saudis to react immediately. Relations between the King and the White House have reportedly soured recently. The promises Abdullah made in 2005 as Crown Prince may not carry so much weight anymore.

  11. JDH

    That’s an interesting theory, GT. But does this line of reasoning lead you to expect increases in Saudi production of the magnitude that IEA is assuming?

  12. GT

    I’ll have to go back and read the IEA MTOMR to see the numbers. I’ll get back to you tomorrow on that.
    But I’ll say this first. The IEA projects non-OPEC numbers (around 53mbpd, but they kind of avoid OPEC numbers and speak in terms of the “Call on OPEC” and “capacity” – meaning potential capacity. This, of course, applies to Saudi primarily, being the “swing” producer (in their view).
    The capacity they speak of – 12mbpd, or whatever is long term, and my guess is as good as yours, or theirs.
    I know this sounds cliche, but my gut is to say “I have no reason to doubt the numbers being talked about.” Of course, reading the Oil Drum, and Twilight in the Desert makes me think the opposite depending on the day.
    In the near term, I don’t see any reason at present why Saudi should raise their production, and (I’m going out on a limb here) I wouldn’t be surprised to see them cut “voluntarily” another 1 mbpd to 7.5. Realistically 9.6 was very high historically. I think this was largely spillover from a possible commitment to the White House for the Iraq War and then fear that $40-plus oil would cause recession.
    This fear has now been turned around and I think they are pushing the envelope.

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