New Perspective From the IEA

An alternative policy scenario

By Syed Rashid Husain

Claude Mandil is a well established and respected name in the energy fraternity. As the executive director of the International Energy Agency (IEA), the OECD energy watchdog, when he speaks on issues concerning the energy world, people listen to him attentively, for he speaks with authority and logic.

Thus when Mandil spoke to the press in London last Tuesday, it was with a reason. The IEA was presenting before the global audience the World Energy Outlook (WEO) 2006, mapping out a cleaner, cleverer and more competitive energy future.’

Mandil says the map was charted in the wake of the fact that keeping in view the current trends, the energy future the globe was facing was “dirty, insecure and expensive.” One definitely need not agree to what all Mandil was saying last Tuesday, yet he carried weight. He represented a school of thought, an interest group within the energy fraternity.

If we carry the current way, the IEA World Energy Outlook 2006 projected the primary global energy demand to go up by just over one-half between now and 2030 — an average of annual rate of 1.6 percent. Demand grows by more than one-quarter in the period to 2015 alone. He was hence emphatic when he said, ‘that fossil fuel demand and trade flows, and green house emissions would follow their current unsustainable path through to 2030 in the absence of new government action.

The report emphasized that the center of gravity of the global demand was shifting, as over 70 percent of the growth during this period was to come from the developing world and China alone accounting for 30 percent of that total.

In case of no remedial action from the governments, which the IEA report refers to as the Reference Scenario, fossil fuel would still account for 83 percent of the increase in energy demand between 2004 and 2030. Consequently the global crude demand would reach 99 million bpd in 2015 and 116 million bpd by 2030 — up from 84 million bpd in 2005.

However, in order to meet the galloping demand, the IEA projects cumulative investment of the order of over $20 trillion over the 25 year period until 2030. Of it, investment oil sector, and that with three quarters of it going into upstream, was estimated at $4 trillion over the same period — huge by any standards. Is that sort of investment forthcoming is anybody’s guess.

In the 2006 WEO, the IEA has once again emphasized that oil supply is increasingly dominated by a small number of producers. OPEC’s share of global supply grows significantly, from (less than) 40 percent now to 48 percent by the end of the outlook period.

Saudi Arabia, according to the projection continues to remain the kingpin, by far the largest producer. It also concedes that non-OPEC conventional crude oil output peaks by the middle of the next decade, though natural gas liquids production continues to rise.

The report also discusses various pricing scenarios and projections through to 2030. Indeed these projections Reference Case scenarios — in situation when things continue as they are today and consuming governments and societies do not take any action to change the outlook. That though looks unlikely.

As per the projections, the average IEA crude oil import price is assumed to be slightly higher than $60 per barrel (in real 2005 dollar terms) during 2006 and 2007 — up from $51 a barrel in 2005.

The report then predicts a decline in the global crude prices — to about $47 a barrel by 2012. The reports then assumes the prices would rise again thereafter — though slowly — reaching somewhere around $55 in 2030. Indeed Mat Simmons & co are not figuring in this OECD projection anywhere, otherwise they would have led every one to believe that crude prices would touch roof over the next few years.

The report urges the governments to take the steps to change the scenario — so as to enhance energy security, raising the issue of consuming countries’ vulnerability to supply disruptions and resulting price shock. سECD and developing Asian countries become increasingly dependent on imports as their indigenous productions fails to keep pace with demand.’’

The report hence warns, “Much of the additional imports come from Middle East along vulnerable maritime routes. The concentration of oil production in a small group of countries with large reserves — notably Middle East OPEC members and Russia — will increase their market dominance and their ability to impose higher prices.”

The IEA report exhorts the consuming nations to take urgent measures to alter the scenario — referred to as alternative policy scenario. The alternative scenario envisages the global oil demand to reach 103 million bpd in 2030 — 20 million bpd higher than 2005 but still 13 million bpd less than projected in the above reference scenario.

The report says that close to 60 percent of this saving could come from transport sector. More than two third could come from more fuel-efficient vehicles. Increased biofuels and nuclear energy use could also help in reducing oil consumption.

There could be people around who agree to all what is said above, yet Mandil and his team cannot be taken lightly. In all the projections being made in the global energy capitals today, the above has to be a part of the overall equation, for it has a direct bearing on their overall well being.

This article was published by Arab News on 10 November