IEA sees oil supply crunch looming

SHAWN MCCARTHY
Globe and Mail
July 9, 2007

OTTAWA — Global oil companies will reap the windfall from growing demand and constrained supply for years to come – and consumers should expect higher fuel prices for the foreseeable future, the International Energy Agency says in a report released Monday.

In its medium-term outlook, the agency warns that higher crude prices over the last several years have failed to trigger the typical market response of slowing demand and additional supplies.

Instead, while demand growth has slowed in the developed world, booming economies in Asia and Middle East have taken up the slack. The emerging economies and developing world will soon account for nearly half the crude oil demand in the world, according to the IEA, which is the energy monitoring arm of the developed world.

At the same time, the agency is forecasting only modest growth in crude oil supplies, as the producers struggle to offset declines from existing fields.
This file photo shows the Seadrill 3 being unveiled at its christening ceremony in Singapore in May, 2006.

This file photo shows the Seadrill 3 being unveiled at its christening ceremony in Singapore in May, 2006. On Monday, the International Energy Agency said it expects demand to rise faster than expected from now until 2012 while production lags, leading to a supply crunch. (Reuters)

“Despite four years of high oil prices, this report sees increasing market tightness beyond 2010,” it concluded.

While there will be some spare capacity among members of the Organization of Petroleum Exporting Countries in the next few years, that cushion will drop to “minimal levels” by 2012.

As a result, the energy agency is forecasting “substantially higher cash returns to shareholders” of global oil companies, whether those owners are governments or private investors.

The IEA does not include a specific price forecast in its outlook, but with crude prices hovering above $70 (U.S.) a barrel, it provides little hope for a significant easing. And it predicts even tighter markets for natural gas at the turn of the decade.

The only potential silver lining for hard-press motorists: investment in refining capacity has picked up, meaning the North America gasoline markets will be better supplied. As a result, refiners' margins, which have driven pump prices higher this year, should ease somewhat.

Globally, the IEA forecasts that demand for crude oil products will grow by 2.2 per cent a year on average to 95.8 million barrels a day in 2012. It expects 1.3 per cent average annual growth in North America, and 0.7 per cent in Europe, but forecasts 3.6 per cent yearly growth in demand in emerging economies and developing world.

But while prices remain high, the agency said supply growth will remain under pressure, partly due to the high cost of production and the delay of major projects. The increasing assertiveness of governments in producing regions will also be a growing factors.

“Supply side uncertainty is further exacerbated by resource nationalism and geopolitical risk, constraining the ability of the industry to produce the 3-million barrels per day of production needed each year to offset the effects of decline,” it said.