Agency says there is no clear sign of a recovery in global oil producing capacity over the medium term.
Oil prices will stay high for 5 years: IEA
Oil markets would remain tight and prices high for the next five years, hurting global economic growth as Opec's cushion of spare production capacity diminished, the energy watchdog for the world's industrialised nations warned today. In its medium-term outlook, the International Energy Agency (IEA) cut its forecast for both world oil supply and demand, while predicting that Opec's spare production capacity would contract almost 50 per cent in five years. "With oil prices hitting US$140 (Dh514) [per barrel], we are clearly in the third oil shock, with prices affecting economic growth," Nobuo Tanaka, the IEA's executive director, told the World Petroleum Congress in Madrid. "Record prices in the oil market in recent months have become a threat to the global economy and social welfare of millions of people," he added. The Paris-based adviser to 27 industrialised nations trimmed five per cent from its previous crude oil supply forecast to 2012, issued a year ago, and 3.7 per cent from its corresponding demand forecast. It projected only a 6.4 per cent increase in world oil supply capacity over the next five years to 96.2 mbpd. Demand, expanding at 1.6 per cent annually, instead of the previously predicted 2.2 per cent, would hit 94.1 mbpd that year, the agency said. Spare capacity, which is expected to rise as high as 4.2 mbpd in three years, will plunge to barely one mbpd by 2013 after a flurry of project start-ups runs its course. The IEA estimates Opec's current spare capacity at 1.95 mbpd. Parting ways with Opec officials who had consistently blamed recent high oil prices on market speculation, the IEA emphasised the role of market fundamentals in driving crude to a record $143.67 per barrel on Monday. "Opec production is at record highs and non-Opec producers are working at full throttle, but [oil] stocks show no unusual build. These factors demonstrate that it is mainly fundamentals pushing up the price," Mr Tanaka said. The agency predicted that oil markets would remain tight over the medium term due to demand growth in emerging markets combined with supply constraints within and outside Opec. Delays averaging 12 months coupled with a projected doubling of costs for oil projects were expected to be a major factor limiting supply. Because of delays a number of ongoing megaprojects, such as the development of Kazakhstan's giant Kashagan field and of ultra-deep-water oil projects in the Gulf of Mexico, would "either make a limited contribution, or no contribution at all" to global supply by 2013, the report said. The IEA also predicted an "abrupt slowdown" in Russian oil production over the next few years, as the country with the world's largest oil reserves outside Opec "grapples with an unattractive tax structure" blamed for holding back investment in its oil sector. Overall, the agency trimmed 2.8 per cent from its non-Opec production forecast to 2012, projecting output would reach 50.7 mbpd. More than 3.5 mbpd of new production would be needed each year just to hold global production steady because of natural declines at existing fields, the IEA estimated. "Our findings highlight again the need for sustained, and indeed, increased investment both upstream and downstream to assure that the market is adequately supplied," Mr Tanaka said. On the demand side, the IEA noted that high oil prices were damping demand for motor fuels among industrialised nations. Drivers were switching to smaller, more fuel-efficient cars and making fewer journeys to reduce spending. Petrol purchases in the US, the world's biggest energy consumer, had dropped every week since the start of the peak driving season last month, Bloomberg reported. "High prices are clearly affecting consumer behaviour," the IEA said in its report. Biofuels output was unlikely to improve the picture, the agency added, due to increased feedstock competition with the food industry, which would constrain biofuels expansion in some places. In one of its few brighter notes, the IEA predicted that 8.8 mbpd of crude oil refining capacity would be added worldwide by 2013, easing the current refinery tightness that was limiting the petroleum sector's flexibility to meet particularly strong demand for certain fuels such as diesel. Most of the new capacity additions would be in Asia, including China and the Middle East, it said. However, the agency noted that "a doubling of costs" and longer lead times for delivery of key refinery components had led to "greater uncertainly over project plans in the refining sector". Underscoring the IEA's supply predictions, Jesus Reyes Heroles, the director general of Mexico's state oil company Petroleos Mexicanos (Pemex), warned today that the country's oil production could plunge by 1.2 mbpd, or more than 40 per cent from the current level of 2.9 mbpd, unless congress approved a controversial energy-sector reform proposal. The proposal to give Pemex more flexibility in granting service contracts and to open refining and pipelines to private investment is opposed by Mexico's main opposition party and by some elements of its governing party. Mexico is among the biggest non-Opec oil exporters. email@example.com