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IEA: Everyone Gets to Be Right
Posted Dec 10, 2008 by Richard Heinberg
In recent days our friends over at The Oil Drum have done a laudable job of dissecting the recent annual report of the International Energy Agency, "World Energy Outlook 2008".
Briefly: the report breaks ground in analyzing petroleum depletion and future supply prospects on the basis of a study of several hundred large oilfields. It warns that "Current global trends in energy supply and consumption are patently unsustainable" and that "the sources of oil to meet rising demand, the cost of producing it and the prices that consumers will need to pay for it . . . [are all now] extremely uncertain." The document also proclaims in no uncertain terms that "the era of cheap oil is over."
At the same time, WEO 2008 forecasts no world peak in oil production before 2030, as long as extraordinarily large investments are made in exploration and in the production of unconventional liquid fuels. (This conclusion is disputed by Oil Drum writers, whose analysis suggests that the IEA report authors started with the conclusion they wanted—no peak before 2030—and then massaged the data vigorously until that conclusion could be supported with appropriate graphs and text).
Some commentators have noted the inconsistency in the tone of the document and have suggested that this results from disagreement between two camps within the IEA, one of which "gets" Peak Oil, while the other refuses to take the notion seriously. The report resolves the debate in a way that is likely to shape official and mainstream media discourse for years to come.
We have indeed just witnessed the peak of world oil production (July 2008). Production is declining now because demand is falling rapidly. Meanwhile, the worldwide credit crisis and low oil prices are conspiring to choke off investment in future productive capacity. By the time demand picks back up (and this may be years hence, given the state of the global economy), depletion and declines in existing fields will have eroded productive capacity significantly, and lack of investment will have precluded adequate replacement of that capacity. End result: we will never again see production levels that were achieved in the middle of this year.
So the Peak Oilers get to be right.
But on the other hand, the argument will be made that this is not a geological peak; it has resulted merely from lack of investment. So the anti-Peak Oilers get to be right too.
The result for society will be the same no matter whose explanation for the events is actually correct. But everyone saves face.
That's nice. Now—what about the consequences of declining oil production? How are we preparing? The IEA's resolution of the Peak Oil controversy may be strong on diplomacy, but it leaves policy makers (the organization's main audience) clueless as to what to do.
Since WEO 2008 tells us that more investment will be required to enable oil production to meet demand, the inescapable take-home message is that we should encourage more investment in oil production.
The report also advises growth in investments in renewable energy sources, but here again one senses that effort is being made to keep everyone happy. In reality, if the world invests more and more in fossil fuels that are becoming increasingly expensive to produce, while investment capital is scarce, this means that the amount available to fund the transition to renewable energy sources will be woefully insufficient.
Diplomacy is often laudable. And it is understandably problematic for large organizations to take strong, controversial positions. But sometimes trying to have it both ways and avoid hard choices just doesn't help.
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6 comments
Interview with IEA Chief Economist
From: Jim MacInnes, Jan 4, 2009 07:52 AM
In this interview with IEA Chief economist, Fatih Birol, it appears that the predicted rate of decline in existing world oil fields is now about 6.7% per year up from their previous forecast of 3.7% per year. This will require a much larger investment in new fields just to maintain existing supply capabilities let alone increase world oil production beyond the July 2008 figure. http://www.guardian.co.uk/business/2008/dec/15/oil-peak-energy-iea
Oil price stability
From: rbblum, Dec 17, 2008 12:42 AM
Given the recent oil price fluctuations of late, perhaps it is timely to not only make a concerted effort in transitioning into renewable energy sources within a projected time period as well as implement a strategy in which oil dependent/importing nations would create a support price for oil at $X per BBL (say $115 BBL) on an annual basis. If oil were to fall below that base price, then a fuel tax should be imposed to maintain the designated support level. On the other hand, should oil price per BBL rise above the support level by more than X%, then there would be a windfall profit tax or excise tax charged to the various downstream/upstream oil companies which could be refunded to ultimate consumers upon filing an annual tax return.
One key measure would be to have a small, nimble oversight agency office with the mission to maintain steady, predictable oil prices during a specific time period with benchmarks transitioning into alternative, renewable energy sources.
The concept may need tweaking but smooth continuity of oil pricing would bode well for a more tranquil geopolitical environment.
Oil consumption
From: Doug Blair, Dec 13, 2008 08:58 AM
"People are not going to stop driving. They haven't so far and if they do it will be minor especially with gasoline prices so low. They will continue to drive their old cars and much to this talk about reduced demand for oil will end up being a canard."
"http://money.cnn.com/2008/12/12/news/economy/driving_decline/index.htm
Driving in America has undergone its most dramatic continuous decline in history, the Department of Transportation said Friday.
Americans drove 100 billion fewer miles during the 12-month period between November 2007 and October 2008 compared with the prior year, according to the DOT's most recent data."
Add this to the jobs data and I don't see how we're going to see an increase in driving miles anytime soon.
Deplection
From: Manuel Vaz, Dec 13, 2008 04:04 AM
Chuck T, the deplection 5 to 9% is suposed to start only on the end of the plateau, by 2012.
Demand in the United States,
From: zulukilo, Dec 13, 2008 12:17 AM
Demand in the United States, depending on what refined product you are looking at or if you are looking at total petroleum consumption, is off between 3 and 10% in 2008 from 2007 levels.
I don't know what EIA report you are looking at or what numbers, but I don't know how you are figuring y-o-y December demand since the latest EIA data is only good through last Friday, which was Dec 5th. But why use the whole month, when you can prove a point with 5 days of unrevised data, right? Try Again.
Since you obviously are one of the few who actually knows where to find these numbers, go back and verify what I said in the first paragraph.
Gasoline and oil are two different things. Gasoline accounts for only roughly 50% of US Petroleum consumption when figured as a straight fraction of barrels.
I keep reading analysis like
From: Chuck T, Dec 12, 2008 11:56 AM
I keep reading analysis like your saying demand may not return for years and that may be true although it has not shown up yet. I keep hearing these dire predictions about oil demand falling off a cliff, but can't find any serious data to back it up. The World Bank scare piece forecasts reduction 450,000 barrels a day hardly a crash. In fact, the EIA report yesterday shows that gasoline consumption in the US was actually up YoY in December (albeit a small.3%). Where is all the demand destruction? Maybe it is coming, but I haven't seen it yet.
Then there is natural supply destruction of conventional oil supplies going called depletion of conventional fields to the tune of 5% to 9% depending on whose numbers you accept. Even if it is only 5%, by the end of 2009 that equals about 4 million barrels a day of current production. With hard to get and unconventional projects shutting down, where are the new supplies coming from?
This tells me supplies will still be tight as 2009 progresses and as all the stimulus programs kick in the economy picks up what happens? Of course there will be some spare capacity, but I am not convinced we really have a handle on how much there really is.
It seems also the recession hysteria is masking the still uncertain geopolitical situation. Are Nigeria, Venezuela, Iran, Iraq, Mexico, Saudi Arabia, Russia etc. more or less stable with oil at $40 a barrel or lower? I think less. One major geopolitical event could pull stocks down fast or even one major infrastructure breakdown. I think these reports by the World Bank, Wall Street Analyst saying the price of oil will be $30 to $40 for the foreseeable future are just as wrong as the reports that oil will be $200 barrel we heard last summer. China, India, Russia and Brazil are not planning on throwing in the towel and shrinking their economics. There will be no real slow down in exporting countries use of oil. So where are the declines in demand coming from?
I don't know what the price will be but I do that the world will burn about 30 billion barrels in 2009 even if the World Bank is correct, find maybe 5 Billion, see current fields deplete at a rate of 5 to 9%, cut back on exploration and development in hard to find and produce areas, probably reduce or scale back maintenance and equipment upgrades further weakening an already stressed supply chain and probably not make much real progress toward reducing dependence on cheap oil.
Also, I think one of the unintended consequences of this recession and crash of the auto industry will be the lack of viable replacements for the 240 million vehicles now on the road and a slow down in increasing the average mpg's of the nations fleet. People are not going to stop driving. They haven't so far and if they do it will be minor especially with gasoline prices so low. They will continue to drive their old cars and much to this talk about reduced demand for oil will end up being a canard.
What am I missing that is causing all this hysteria about crashing demand and oversupply? Maybe you can write a future column to help me see the errors in my thinking Thanks.