The IEA was established in 1974 with a mandate to promote energy security amongst its members, namely the states of the OECD, and to advise those members on sound energy policy. Its recent forecasts of the medium and long term prospects for oil supply, however, have wavered, alternating from optimistic to pessimistic and back again. For policy-makers, such inconsistency is difficult to deal with. Firstly we examine whether the changing outlooks seen in IEA forecasts made between 2007 and 2010 truly reflect a demonstrable, underlying change in the known facts, and we can find no such factual changes reported by the IEA. Secondly we examine whether the serious criticisms of the IEA’s (2008) forecast made by other analysts have yet been addressed, and we conclude that they have not. Thirdly we consider the possible effects of the current economic downturn upon the IEA’s assumptions and upon future oil supply. We conclude that all the forecasts made by the IEA appear to be too optimistic throughout this period.
► IEA forecasts of oil supply have changed from optimistic to pessimistic and back. ► The reasons for the changes are listed, examined and found wanting. ► The most appropriate IEA forecast is nevertheless the most pessimistic one. ► Some criticisms of the forecast methodology and assumptions are described.
From the Oil Depletion Analysis Centre press release:
British energy policy is founded on dangerously optimistic assumptions that need to be urgently reassessed, according to a paper from the Oil Depletion Analysis Centre (ODAC) published today.
As the upheavals in the Middle East drive the oil price ever higher, the report identifies a litany of questionable assumptions that underpin the forecasts of the International Energy Agency (IEA), on which UK policy is based.
Energy Secretary Chris Huhne has recently acknowledged the potential economic impact of the recent surge in oil prices1, but not yet the much greater risks the government is running by relying on IEA forecasts of the oil supply.
The paper, Future oil supply: The changing stance of the International Energy Agency, published in the Energy Policy Journal2, shows how IEA forecasts in recent years have shifted from optimistic to pessimistic and back again, as assumptions changed, and how its methodology is flawed.
The report’s author, ODAC trustee Dr Richard Miller said, “Events in the Middle East have grabbed attention, but the flaws in the IEA’s analysis are potentially more serious in the longer term. We are flying blind into an even more dangerous crisis.”
In recent years, the IEA’s annual World Energy Outlook has consistently forecast that oil supply will match demand until at least 2030 – even while warning of the enormity of the challenge. In WEO 2008, for instance, the Agency warned that 64 million barrels per day (mb/d) of additional gross production capacity would be needed by 2030, the equivalent of almost six times that of Saudi Arabia today – but insisted it could be done.
In the paper, Dr Miller highlights several changes the IEA has made to its technical assumptions since 2008, which undermine its conclusion that supply and demand will balance at a tolerable oil price for decades to come. Specifically:
• The IEA has cut its assumed annual decline in existing oil production capacity, from 3.5–3.7 mb/d to 3.1 mb/d (see notes). This may be valid, but no-one can verify the change without access to the IEA’s confidential data. It could also be a temporary effect caused by the economic downturn. If so, global production capacity would have to expand by an additional 10 million b/d by 2030 to meet the IEA’s demand forecast, equivalent to an entire new Saudi Arabia.
• The IEA has raised its assumed efficiency gain in oil use from 2% to 3% per annum. The Agency has not justified this change or provided any evidence to support it. If such evidence exists, again it could be a temporary effect of the recession. If the assumption is wrong, production would have to expand by an additional 2 million b/d every five years to meet the IEA’s demand forecast.
• The IEA assumes higher oil production from Brazil (an additional 3.2 mb/d by 2030), Iraq (+4.5 mb/d), and the Canadian oil sands (+1.7 mb/d). All three sources have significant obstacles to growth, such as environmental issues or insurgency, and all are competing for the same investment cash. It is not clear that the IEA has fully considered these difficulties. Together, the IEA expects these three regions to produce an extra 9.4 million b/d by 2030.
Dr Miller also reaffirms two key flaws in the IEA’s methodology originally exposed in 2009 by Aleklett et al3, UKERC4 and others:
• The IEA appears to count every fallow field (discovered but with no development plans) as economically viable. It is likely that a significant proportion, perhaps 25–50%, can never be exploited at an affordable price.
• In the IEA modelling, the required rate of production from both fallow fields and yet-to-find fields appears implausibly high against the industry’s past performance. In the IEA’s model, the implied depletion rate (see notes) in these fields is as high as 16% per year, whereas the highest rate achieved to date, in the North Sea, is 7%.
Taken together, these points suggest that the IEA’s oil supply forecast are not credible, and that global oil production is likely to peak with a few years. Given the vital importance of oil to the economy, ODAC urges government to reassess its reliance on the IEA’s forecasts, and begin urgently to prepare for an oil crisis far more severe than the current upheavals in the Middle East and North Africa.
Notes to editors:
1. Existing oil production capacity inevitably shrinks over time due to falling reservoir pressures and water breakthrough. Estimates of the annual global decline rate range between 4% and 5%, or a decline of 2.9 mb/d to 3.7 mb/d production capacity. This is what the industry has to add each year just to stand still.
2. The depletion rate is the percentage of the remaining oil that is produced each year. It should not be confused with the decline rate (above), although in some circumstances the numbers are identical.
3. Dr Miller’s paper has been submitted to the Department of Energy and Climate Change, during its call for evidence on the future oil supply. DECC is due to produce its report on the subject shortly.
4. Dr Miller is a geologist by training (Oxford, Alberta and Cambridge), with early experience in gold mining and uranium, before joining BP in 1985. In BP he had a varied career, primarily as a geochemist. He has been looking at peak oil issues for 15 years, and used to provide an annual in-house report for BP on likely oil productivity out to 2030, before retiring in 2008.
5. The Oil Depletion Analysis Centre (ODAC) is an independent, UK-registered educational charity working to raise international public awareness and promote better understanding of the world’s oil-depletion problem.