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November 2008

Vol. 13, No. 46 Week of November 16, 2008

Expect oil to hit $200

IEA forecasts sharp rise in prices; trillions needed for new investments by 2030

The Associated Press & Petroleum News

The International Energy Agency nearly doubled its forecast for the price of oil over the next 20 years, citing rising demand in the developing world as well as surging costs of production.

According to a summary of the agency’s World Energy Outlook report published in full on Nov. 12, the IEA has hiked its forecast for the price of a barrel of oil in 2030 to just over $200 in nominal terms, compared to its forecast last year of $108 a barrel.

Measured in constant dollars, the IEA forecasts oil at $120 a barrel in 2030, up from last year’s forecast of $62.

The predictions come after crude oil prices peaked at $147.27 a barrel in mid-July before diving around 60 percent to trade around $58.91 on Nov. 11.

The IEA — an energy policy adviser for its 26 member countries, including the United States, Canada, Australia, Germany and Britain, as well as 17 other European countries — said spending on oil as a share of global economic output will rise to 5 percent over the period, compared to 4 percent last year.

“The only time the world has ever spent so much of its income on oil was in the early 1980s, when it exceeded 6 percent,” the IEA said.

Slowdown in global demand

The IEA cut its forecast for global oil demand growth to 1 percent a year on average over the next two decades.

It now sees demand growing from 85 million barrels per day last year to 106 million bpd in 2030. That compares with last year’s forecast, when the IEA saw global oil demand reaching 116 million bpd by 2030.

Higher prices, slower economic growth and government policies over the last year have helped cool demand in the developed world. Nearly all the growth in demand for oil over the period will come from China, India, and the Middle East, the IEA said.

Demand for all forms of energy is forecast to grow 1.6 percent a year over the period to around 17 billion tons of oil equivalent a year, with half the new demand coming from just two countries: China and India. Last year, the IEA forecast energy demand to grow 1.8 percent annually over the period.

Because the recent drop in oil prices over the latter half of the year was caused by a global economic downturn, and not by increased efficiency or massive new finds, many analysts expect prices to shoot back up again once world markets finally turn around.

“A downturn in world economic growth, which appears to be a fact we can look forward to, will reduce demand for oil and significantly reduce investment in the search for new oil,” Roger Herrera, an energy consultant who frequently provides oil price forecasts for Petroleum News, said on Nov. 2.

Herrera said “supply and demand for oil will probably stay in balance for the time it takes the world to get out of recession,” meaning prices are “not likely to move significantly unless OPEC intervenes,” which Herrera doesn’t believe is likely.

But while lower prices should help consumers in the short term, they could seriously impede the motivation for necessary long-term investment, Herrera said.

“Little or no new investment in big projects to find new oil for two or three years would be a disaster for our future,” Herrera said.

Despite the lowered growth forecast, the IEA lifted its estimate of the investment in energy infrastructure needed to meet the rising global demand for energy by 2030.

“The industry will have to invest $350 billion each year until 2030 to counter the steep rates of decline of existing fields and find enough extra oil to satisfy the growing demand of countries such as China,” according to the Financial Times.

The drop in oil prices has already jeopardized the economics of expensive ventures like the Canadian oil sands and offshore prospects in Brazil. Even “relatively easy oil” is getting more expensive to produce, Herrera said, meaning “when our economic funk dissipates in a few years and we want to increase production of world oil to fuel the new growth, we will probably find that there is no extra oil available.”

According to the Financial Times, “the IEA estimates that by 2010 oil companies will have to commit to projects producing almost as much oil as Saudi Arabia — or about 7 million barrels a day — if the world is to avoid a supply crunch by the middle of the next decade.”

Combine that possible supply crunch with a market “psychologically OK” with $140 a barrel oil, and Herrera said we “could easily see oil over $200 in the next three or four years,” echoing the forecast from the IEA report.





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