IEA: High oil prices, economic growth can coexist

By OGJ editors
HOUSTON, June 16
-- The juxtaposition of triple-digit oil prices and 4-5% global economic growth looks paradoxical, but it partly reflects the time lags that affect oil market dynamics, the International Energy Agency said in its latest medium-term oil and gas markets report.

High oil prices, buoyant economic growth, and climbing oil-demand growth can coexist for a while, the Paris-based agency said, and then the market will ultimately adjust to the higher prices. The price inelasticity of oil underpinned the recent, extended upward price shift in the face of both resilient demand growth in developing countries and perennial supply-side risks, IEA noted.

The report, which examines market prospects through 2016, said that the market’s supply flexibility with spare production capacity and oil inventories among the developed countries of the Organization for Economic Cooperation and Development has diminished despite increased upstream activity and resurgent supply from outside the Organization of Petroleum Exporting Countries. Most analysts underestimated the nearly 3 million b/d postrecession rebound in 2010 oil demand, the agency said.

IEA’s base case in this medium-term report, with global economic growth averaging at least 4.5%/year, shows a tighter market during 2010-12 than expected in December 2010. Market conditions potentially will ease marginally during the 2013-16 period, although the 4 million b/d spare capacity implied for much of that period looks like a fairly thin supply cushion, the agency warned.

Annual growth in worldwide oil demand could average 1.2 million b/d between now and 2016, while natural gas demand could grow by 500 billion cu m, which is about 2.5 times Russia’s current gas exports, IEA said.

The agency uses an average crude oil price assumption of $103/bbl, or around $20/bbl more than in last year’s medium-term outlook. Based on this assumption, the report projects the following outcomes in oil markets:

• Growth in global oil production capacity averages 1.1 million b/d annually through 2016 to 100.6 million b/d, as higher prices unlock new supplies. Iraq, UAE, and Angola lead growth prospects from OPEC, while Brazil, Canada, Kazakhstan, and Colombia drive non-OPEC increases. Conventional oil accounts for less than 40% of the increase, while natural gas liquids, biofuels, and unconventional oil from onshore US account for the majority of new supplies.

• While spurring investment in exploration and development, higher oil prices threaten to weaken economic growth and curb demand. Accordingly, the report presents both a base-case scenario in which demand reaches 95.3 million b/d in 2016 and a low-GDP variant in which demand is 92.8 million b/d by 2016.

• In both demand scenarios, China, Asia, and the Middle East together generate about 95% of net growth.

The report makes the following projections for gas markets:

• As gas consumption grows by 2.4%/year between now and 2016, gas continues to increase its share of the global energy mix. Non-OECD markets are the main drivers of this demand growth as they also contribute to 90% of additional supplies.

• Global trade expands rapidly as more countries become gas importers. About one third of global demand growth comes from China, which emerges as one of the biggest importers of pipeline gas and LNG while rapidly increasing its domestic production.

• Australia becomes a leading LNG exporter, rivaling Qatar. Australia becomes the key source of gas for growing demand in the Asia-Pacific.

• In the US, the shale gas revolution continues. As domestic gas drives out imported LNG, North America is a segmented “island” market where low prices stimulate demand, especially in power generation and the chemical industry.

• But in Europe and the Asia-Pacific, oil indexation remains relevant despite the increasing liquidity and efficiency of gas trading hubs. Increasing gas demand and depleting domestic resources in Europe will lead to growing European dependence on a small number of exporting countries.

• Nevertheless, the globalizing LNG trade plays an increasingly important role of linking regions and reacting to supply-demand disturbances.



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