There’s still time to change the road we’re on

November 18, 2008

 That warning occurs in the second line of the International Energy Agency’s (IEA) latest World Energy Report. The ominous tone may seem out of place today, with gas prices falling below $2/gallon, and closer to home, resins like polypropylene (PP) testing multiyear lows of $0.30-$0.40/lb, but the IEA believes the respite is temporary and reflects the global recession more so than a shift in the underlying supply/demand fundamentals, explaining, “The surge in prices in recent years, culminating in the price spike of 2008, coupled with much greater short-term price volatility, have highlighted just how sensitive prices are to short-term market imbalances.”

Looking forward, the IEA forecasts that world primary energy demand will grow an average of 1.6%/yr from 2006-2030, increasing over that time by a total of 45%. In spite of the growth, the IEA does say the world’s total endowment of oil is enough to supply the globe with oil for more than 40 years at current rates of consumption. To get to that scenario, however, new finds will have to continue, with undiscovered resources accounting for about one third of the remaining recoverable oil. The largest volumes of that yet-to-be-found oil are believed to be in the Middle East, Russia, and the Caspian region—not all areas that Western Countries have reliably found friendly.

These finds will also be needed to compensate for oil-production declines. A field-by-field analysis of historical production by 800 fields, shows that observed declines are likely to accelerate globally over the long term. Understanding that, the IEA says that investment in 1 million barrels/day (mb/d) of additional capacity, which is equal to the entire capacity of Algeria today, will be needed each year by the end of the projection period simply to offset projected declines.

The global demand increases largely occur outside of developed nations, potentially limiting the ability of North America and Europe, for example, to positively impact prices through conservation. China and India account for more than half the increase in global primary energy demand between 2006 and 2030, with Middle East countries contributing 11% to incremental world demand. All told, non-OECD countries account for 87% of the increase, lifting those countries’ share of energy demand from 51% to 62%.

All these projections assume average crude oil import prices of $100 per barrel (in real year-2007 dollars) from 2008-2015, before rising to more than $120 in 2030. In nominal terms, prices are projected to double to just over $200/barrel by 2030. While that upslope looks relatively tame compared to what happened in July when a barrel of oil hit $147, IEA says “…pronounced short-term swings in prices are likely to remain the norm and temporary price spikes or sharp falls cannot be ruled out.”

Part of that volatility is due to the shrinking buffer inventory between total production and total demand. The IEA posits that world oil supply will rise from 84 mb/d in 2007 to 106 mb/d in 2030. That mirrors the anticipated growth in demand over the same time from 85 mb/d in 2007 to 106 mb/d in 2030.

In other words, it still might not make sense for processors to think that the Summer of 2008 was simply a blip, a painful blip, but just a blip. “While market imbalances could temporarily cause prices to fall back, it is becoming increasingly apparent that the era of cheap oil is over.”—[email protected]

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