Everything you need to know from IEA’s World Energy Outlook
Every year, energy analysts wait for the release of the World Energy Outlook, IEA’s definitive annual forecast of energy market trends. At first blush, it looks like smooth sailing for oil markets. Brent crude oil prices fell below $80 per barrel for the first time since 2010, and United States crude oil production topped 9 million barrels per day last week, the highest production level since before the 1980s. Meanwhile, non-OPEC oil production growth has outstripped demand growth for the past five quarters—and this unprecedented dynamic is expected to continue into 2015. With average gasoline prices holding comfortably below $3 per gallon for most Americans, it’s easy to assume that all is well. Not so, says IEA. In fact, the oil markets section of this year’s report is essentially an extended treatise on why temporary lows in oil prices not only don’t make the world more energy secure, but could ultimately undermine the reliability of oil supplies down the line. Last year, IEA’s Chief Economist, Fatih Birol, warned that “key Gulf producers have been adopting a 'wait and see approach' to investment, because of the perception that the US shale revolution would produce an 'abundance of oil',” and emphasized that if we want Middle East supply to exist in 2020, investments need to be made now. In the most recent release, even as U.S. production continued to increase, those warnings became even direr. “The global energy system is in danger of falling short of the hopes and expectations placed upon it,” the IEA said during the report release. “The short-term picture of a well-supplied oil market should not disguise the challenges that lie ahead as reliance grows on a relatively small number of producers.” But first, let’s look at a few of the topline numbers:
- Oil demand is slated to grow by 14 mbd by 2040, in the “New Policies” scenario—IEA’s central projection. By that point, 75 percent of consumption will be in the transportation and petrochemicals sectors, where oil is most challenging to displace.
- China will overtake the United States as the world’s largest oil consuming country by 2030, a projection that has remained the same from last year’s report. Chinese oil demand will climb rapidly through the early 2030s, but growth will quickly level off once reaching a saturation point for transportation demand.
- Global demand will continue to shift towards non-OECD countries, which will account for roughly two-thirds of global oil demand in 2040 in basically all scenarios. OECD countries’ share of global oil use has already dropped off rapidly: The developed world consumed 60 percent of global oil supply as recently as 2000. Now, that share is only 45 percent.
- For every barrel of oil eliminated by OECD countries (roughly 10.2 mbd over the projection period) two will be added by the non-OECD, with the China and India’s demand growth alone offsetting all of the OECD’s reductions.
- The United States will see oil consumption decline by the largest absolute share: Our total crude oil consumption will drop from 17.5 mbd today to 13.4 mbd in 2040. For context, that 4 mbd of change is more than the entire continent of Africa consumes today (3.6 mbd). The large drop from the United States will materialize due to “large untapped potential” for fuel efficiency gains in this country, especially in regard to heavy-duty vehicles.
- OPEC’s share of global supply will actually increase, from 40 percent now to 49 percent by 2040. IEA sees the sequence of events as follows: conventional supplies in Russia and Kazakhstan will decline, and their drop will coincide with a tailing off in U.S. shale production. As global demand growth will continue to increase during this period, the onus to meet that demand will move towards OPEC, as well as other large non-OPEC reserves such as the Canadian tar sands and Brazilian deepwater.
- Transportation energy will continue to be dominated by oil; from powering its current share of 93 percent of global transportation, it will fall slightly to 85 percent. The largest declines in transportation-related oil demand will come from global efficiency improvements, rather than fuel-switching, or widespread adoption of alternative fuel vehicles. This is problematic, as it leaves this sector highly vulnerable to oil prices, which are unlikely to remain at their current lows in the medium and long-term.
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