A prolonged period of lower oil prices would benefit consumers, but would trigger energy-security concerns by increasing reliance on a small number of low-cost producers “or risk a sharp rebound in price if investment falls short,” the International Energy Agency warned Tuesday.
A surge in renewable energy deployment and a period of low oil prices is giving the world a false sense of energy security, the Paris-based agency warned in its benchmark annual World Energy Outlook.
“It would be a grave mistake to index our attention to energy security to changes in the oil price,” IEA executive director Fatih Birol, said in a statement. “Now is not the time to relax. Quite the opposite: a period of low oil prices is the moment to reinforce our capacity to deal with future energy security threats.”
The global oil industry needs to invest US$630 billion “just to compensate for declining production at existing fields and to keep future output flat at today’s levels” the energy watchdog said.
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But the beleaguered global oil and gas industry, which is estimated to collectively cut its capex spend by 20 per cent this year, is unlikely to hastily reach for its checkbooks, as it sees considerable uncertainty in the market.
The world is on a relentless path towards decarbonization, with estimates of 60 cents of every dollar invested in new power plants to 2040 on renewable energy technologies.
This trend would likely gain even more traction as carbon dioxide levels crossed the symbolic threshold of 400 parts per million this year, according to a report by the World Meteorological Organization on Monday.
The IEA report recommends that the UN climate summit in Paris at the of this month, to be attended by Prime Minister Justin Trudeau and U.S. President Barack Obama, should “secure stronger climate commitments” from policymakers.
Despite the headwinds, oil prices should reach US$80 per barrel by 2020, says the IEA, but it’s clear that we are at the tail end of China’s insatiable appetite for energy resources.
The world’s second-largest economy would see its net oil imports at nearly five times those of the United States by 2040, but growth will slow down as its service-based economy would need 85 per cent less energy to generate each unit of future economic growth than in the past 25 years, the IEA said.
Non-OPEC producers would see their capacity reach 55 million barrels per day by 2020, reversing from its current level of 58.3 million bpd as high-cost producers retreat, the IEA estimates.
While U.S. tight oil production should resume its upward march as prices recover, the industry may start plateauing by 2020 to just above five million bpd, before declining.
“Tight oil’s rise is ultimately constrained by the rising costs of production, as operators deplete the ‘sweet spots’ and move to less productive acreage,” the IEA said in its benchmark forecast.
In IEA’s low-case scenario in which oil prices remain around US$50 per barrel till the end of the decade, the Middle East’s share in the oil market ends up higher than at any time in the last forty years.
“Lower prices are not all good news for consumers,” said the IEA. “The economic benefits are counterbalanced by increasing reliance on the Middle East for imported crude oil and the risk of a sharp rebound in price if investment dries up.”
On Monday, chief of Saudi Arabia’s state-owned oil company told the Financial Times that it will persevere with its policy of producing crude oil at record levels even it means short-term suffering for its own economy.
“We have seen the pain,” Aramco chairman Khald Al-Falih told the London-based paper. “The only thing to do now is to let the market do its job.”
There will be no plain sailing for natural gas either, as it fights with renewable energy for market share. Most long-term gas projects involve intensive pipelines and large-scale liquefied natural gas developments, a model that would struggle in a lower-for-longer price era.
“Keeping these project costs under control (contrary to numerous recent examples of overruns) will be vital to the future competitive positioning of gas,” the IEA said.
Meanwhile, coal, which has seen its share of the energy mix rise to 29 per cent to day, from 23 per cent in 2000, will see its momentum ebb away, “and the fuel faces a reversal of fortune.”