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Wednesday, July 11, 2007

James Hamilton: IEA Becomes More Pessimistic

A recent IEA report paints a pessimistic picture of oil markets in the near future. I'm going to turn the microphone over to Jim Hamilton and let him explain what this means. Here's a condensed version of his remarks on the issue:

IEA becomes more pessimistic, by James Hamilton on energy: 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... The increased strain comes from a number of different sources. The IEA is now anticipating world oil demand in 2010 ...[to be] 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... The IEA also makes clear they are not signing on to peak oil...

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 2 mb/d 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..., even as their "implied OPEC spare capacity" drops... 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 declined by 2 mb/d 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?

    Posted by on Wednesday, July 11, 2007 at 12:06 AM in Economics, Oil | Permalink  TrackBack (0)  Comments (9)


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