The Worst Oil Crisis Ever? IEA Sees Unprecedented Decline In Investment

“We see a broad shift of spending toward cleaner energy, often as a result of government policies,” Fatih Birol, the IEA’s executive director, said in a statement. “Our report clearly shows that such government measures can work, and are key to a successful energy transition. But while some progress has been achieved, investors need clarity and certainty from policy makers. Governments must not only maintain but heighten their commitment to achieve energy security and climate goals.”

Oil and gas investment declined by 25 percent in 2015 to just $583 billion. The declines are expected to continue through this year, falling by another 24 percent to $450 billion. By way of comparison, oil and gas investments exceeded $750 billion in 2014.

“It may well be the case that investment will fall in 2017,” Birol told The Wall Street Journal in an interview. “We have never seen [a three-year decline] in history,” he said.

The U.S. represented half of the decline in energy investment, with total spending at $280 billion in 2015, down nearly $75 billion from the previous year. U.S. shale in particular saw investment fall by 52 percent. On the other hand, oil and gas investments held up pretty well in the Middle East and Russia, where developing oil reserves is much less costly and still works in an era of low oil prices. Related: Saudi Arabia Overtakes U.S. As Largest Oil Producer

To be sure, much of the fall can be attributed to cost deflation – lower oil prices and falling costs for equipment and services. The IEA says that cost deflation accounts for about two-thirds of the total decline. But the other third is due to falling activity.

Renewable energy saw global investment hit $313 billion in 2015, or about one fifth of total energy spending. In fact, renewables were the largest source of power investment, and the investment in new renewable electricity capacity was more than enough to cover the growth in demand, a sure sign that renewables will continue to capture market share.

For oil and gas, the severe cutback in spending raising the possibility of tighter supplies in the future, the IEA cautions. Because fossil fuel supplies cannot be ramped up at a moment’s notice, producers may struggle to keep up with demand once the surplus is worked through. That suggests higher prices will return.

oilprice.com