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Alphabet Soup

In the energy sector there is a confusing list of groups largely referred to by only their initials. Today one of those groups, the International Energy Agency or IEA, put out a revised forecast for supply and demand through 2013. The IEA acts as an energy policy advisor to 27 member countries in an effort to supply reliable energy to their citizens. Their primary mission is to coordinate measures in times of oil supply emergencies. As part of their mission they conduct extensive research into supply and demand projections.

On Tuesday they issued a press release saying "despite slowing oil demand the IEA sees continued market tightness over the medium term." They are seeing some demand destruction due to price in the 30 OECD countries. (Organization for Economic Cooperation and Development.  These are the already developed countries like Ireland, Italy, Spain, Germany, America and the UK.) However, supply constraints, refinery limitations and continued demand growth in emerging markets will maintain pressure on prices over the medium term. (2008-2013) The IEA said OPEC (Organization of Petroleum Exporting Countries) production is at record highs and non-OPEC producers are working at full throttle, but stocks are not showing any unusual build. "Those factors demonstrate that it is mainly fundamentals pushing up prices" according to Executive Director Nobuo Tanaka.

Supply growth coming from a concentration of new projects coming to market between 2008-2010 along with weaker economic growth will push potential spare capacity to 4 million barrels per day. However from 2011 onward that spare capacity will shrink to minimal levels by 2013. Since the same time last year significant downward revisions have been made to both non-OPEC supplies and OPEC capacity forecasts. Project delays averaging 12 months, coupled with global average decline rate of 5.2%, up from 4% last year, are the factors behind these revisions. "Over 3.5 mbpd of new production will be needed each year just to hold global production steady. Our findings highlight again the need for sustained and indeed, increased investment both upstream and downstream to assure the market is adequately supplied."

Although biofuels will add to supply growth, increasing to 1.35 mbpd in 2008 to 1.95 mbpd by 2013, announced capacity additions may be difficult to achieve given available feedstock and growing concerns due to rising food prices.

Growing demand for oil products will grow by an average of 1.6% per year to 2013, from 86.9 mbpd in 2008 to 94.1 mbpd in 2013. Contrary to supply trends, demand growth will be weakest in the first two years of the period and building as global growth strengthens from 2010 onward. Total consumption by emerging economies will exceed that of developed countries by 2015. An anticipated 8.8 mbpd of new refinery capacity will be added to the system by 2013. This should cover supply increases over this same period. Since most will have heavy sour crude capability they will help to relieve the pressure on light crude prices.

Reading between the lines on this report suggests the coming years will be rough were it not for the current demand destruction due to price in the developed nations. Current projections by the EIA (Energy Information Agency) suggest demand could decline by -1.6% in 2008 if prices remain high. Since that is almost exactly the amount of increase on a global scale it only means demand is pausing rather than declining. As consumers grow accustomed to the higher prices they will return to the gas pump. It has functioned this way since 1918.

The most important piece of the puzzle for me is the admission that global depletion had risen to 5.2% per year, up from 4% in 2007. With daily production at 86.7 mbpd that 5.2% depletion equates to slightly more than 4.5 mbpd per year. The 3.5 mbpd depletion number the IEA quoted was the 4% rate for 2007. Using the current 1.6% demand growth rate of 1.4 mbpd and the current decline rate of 4.5 mbps means we have to find and produce another 5.9 mbpd of new oil each and every year just to stay even and handle demand growth. Using the megaprojects database as far out as I can see there is only one year in our future where that much new oil is coming to market and that is 2009. Those projects have been under construction for the last 5-7 years. After 2009 there is a real lack of any material production currently scheduled. Since it takes years to plan, drill, construct and produce, any future projects for 2010-2013 should already be on the boards. They are not and this is the scary part. Just having one good year every decade will not keep us from a permanent decline in oil production. Every year needs to be a good year. Every day the sun shines the demand for oil increases and the current supply decreases.

At the current population growth rate we are adding another billion people to the planet every 12 years. In 1999 we had 6 billion and in 2012 there will be 7 billion and 8 billion by 2021. As each generation matures they will want the same or better lifestyle as their parents with better food, housing and of course transportation. In much of the developed world that means cars.  As the emerging economies mature they will drive more cars and consume more oil and not with a growth rate of 1.6% but closer to 10%. There are many analysts who claim the world will never be able of producing 90 mbpd. That is the expected demand rate for 2010. If that rate can never be exceeded there will be a billion new consumers who will feel cheated of their right to prosper. It may not be a pleasant place to live when major countries go to war over their rights to a declining oil resource.

Jim Brown

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