Why is the IEA Report Considered Good News?

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The International Energy Agency’s World Energy Outlook 2012 has set off a round of celebrations with its prediction that the United State will overtake Saudi Arabia as the world’s biggest oil producer by 2020 and become virtually energy-independent by 2035.

A careful reading of the report, however, indicates that it might be better to hold off on the festivities.

The second paragraph of the executive summary begins as follows:

Taking all new developments and policies into account, the world is still failing to put the global energy system onto a more sustainable basis.

That doesn’t sound like good news to me. The paragraph goes on to state:

Despite the growth in low-carbon sources of energy, fossil fuels remain dominant in the global energy mix, supported by subsidies that amounted to $523 billion in 2011 . . .. The cost of fossil-fuel subsidies has been driven up by higher oil prices; they remain most prevalent in the Middle East and North Africa, where momentum towards their reform appears to have been lost.

This sounds like something worth noting.  Subsidies for oil consumption are concentrated in oil-producing states, particularly those in the Persian Gulf. Iran spends $80 billion a year to steer oil to its own population and other countries are not far behind. This suggests only one thing. Oil-producing states are far more concerned with pacifying their restless populations than they are in putting oil onto the world market. Subsidies may cost governments money but they keep people happy. And they keep the oil at home.

So what is likely to happen as these populations grow larger and more demanding? Saudi Arabia is already spending half its income on social welfare programs and is starting to run budget deficits. This does not seem like a situation in which the world should be putting too much trust for its future oil supplies.

Read closely, World Energy Outlook 2012 is filled with such caveats. Yes, the unlocking of tight oil and gas will give a huge boost to American oil production in the next decade, but it is not expected to last.

A surge in unconventional supplies, mainly from light tight oil in the United States and oil sands in Canada . . push non-OPEC production up after 2015 . . .. This is maintained until the mid-2020s, before falling back . . . in 2035. Output from OPEC countries rises, particularly after 2020, bringing the OPEC share in global production from its current 42% up to 50% by 2035.

In other words, the long-range result of our surge in unconventional oil may only leave us even more dependent on OPEC in the following decade! Clearly, this is not a promising long-range scenario.

One other factor that looms large in the IEA Report is the coming emergence of Iraq as the world’s second-largest supplier.

In our projections, oil output in Iraq exceeds 6 mb/d in 2020 and rises to more than 8 mb/d in 2035. Iraq becomes a key supplier to fast-growing Asian markets, mainly China, and the second-largest global exporter by the 2030s, overtaking Russia.

Iraq has a long history of instability and competes with Iran in offering huge subsidies to its people for the consumption of domestic oil. It too seems like an unreliable place on which to be banking for long-term supplies.

The underlying problem, as the IEA continually points out, is that oil has no real competition in the transportation market. As developing countries expand their use of cars and trucks, this can only drive oil prices higher:

Growth in oil consumption in emerging economies, particularly for transport in China, India and the Middle East, more than outweighs reduced demand in the OECD, pushing oil use steadily higher . . . [T]he IEA crude oil import price rises to $125/barrel (in year-2011 dollars) in 2035. . . .The transport sector already accounts for over half the global oil consumption, and this share increases as the number of passenger cars doubles to 1.7 billion and demand for road freight rises quickly. The latter is responsible for almost 40% of the increase in global oil demand.

This price increase alone will ensure that Americans will pay $3 trillion over the next ten years for oil imports – more than we have spent over the last decade. This is equivalent to 75 percent of the financial shortfall faced by the federal government over the same period. Without unleashing ourselves from world oil markets, there is very little hope we will be able to find a resolution to our financial difficulties.

The only glimmer of hope comes from the IEA’s assessment that natural gas is on a path to overtake oil as America's leading source of energy.

Natural gas is the only fossil fuel for which global demands grows in all scenarios, showing that it fares well under different policy conditions; but the outlook varies by region. . . . In the United States, low prices and abundant supply see gas overtake oil around 2030 to become the largest fuel in the energy mix.

The problem is that at present these supplies cannot be used in the transport sector, where 70 percent of our oil is consumed. But converting this gas to liquids - such as methanol, which can readily be substituted for gasoline in cars and trucks - would enable us to achieve the independence from foreign oil that the EIA so optimistically predicts. It seems worth a try.

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