The International Energy Authority (IEA) forecasts a yearly increase of 1.3% in global oil demand during the period 2013-2019. This contrasts with the assumption of global economic growth rising from 3.6% in 2014 to around 4% thereafter[1]. How does a 1.3% increase in oil usage support economic growth of about three times that amount?

The oil intensity of growth has been decreasing over time, with global oil intensity falling from  1:1 (a 1% increase in global oil consumption required for each 1% of global economic growth) to a ratio of 0.75:1, between 1995 and 2009[2]. An extrapolation of that trend would result in an average oil intensity of about 0.65:1 during the 2013-2019 time period, with 1.3% growth in oil demand driving about 2% global economic growth. The IEA assumes a much lower level of oil intensity during the period, due to a number of factors:

–          Plentiful natural gas supplies in the United States promote the substitution of natural gas for oil. This assumes that the shale gas revolution in the U.S. will continue, and that prices of natural gas in North America will not rise. Shale gas production may continue to increase, but most probably will require higher prices to support ongoing producer profitability. In addition, any major removal of restrictions on exports of U.S. natural gas would lead to an equalization of North American prices with much higher world prices. This assumption may be said to be somewhat optimistic.

–          A new round of government environmental restrictions which will act to reduce oil intensity. This is a completely speculative assumption.

–          The ability of Japan to restart its nuclear power generating plants by 2016, reducing demand for oil and other substitute boiler fuels. This is an optimistic assumption.

–          Reduced oil intensity in China, as it becomes wealthier and focuses on less oil-intense development (oil intensity tends to fall as the share of services within an economy increases[3]). China has been a previous drag on oil intensity reductions, as its early growth was heavily oil dependent. A reasonable assumption.

–          Reduced oil intensity in Saudi Arabia, as it strives to reduce its very high oil usage. Continued rapid Saudi population and economic growth may easily overwhelm any attempts at increased oil use efficiency, and the need for the Saudi ruling class to keep bribing the rest of the population with cheap fuel places severe constraints upon its actions. As energy analyst Jamie Webster puts it, “There is not much use in ensuring you have adequate exports [by reducing domestic consumption] if the method to get there puts your [the Saudi ruling class] existence into jeopardy”[4]. Saudi domestic oil consumption has continued to increase in recent years, from 2.79 mbpd in 2011 to 2.98 mbpd in 2013[5]. The Export Land Model[6] devised by Jeffrey Brown seems to be alive and well, whether the IEA wants to accept the ramifications or not. A rose-coloured glasses assumption.

If any of these assumptions do not fully pan out, as seems reasonable, the possible rate of global economic growth will be reduced. On the global liquids supply side (crude oil, plus condensates, natural gas liquids, biofuels), the IEA predicts a 10% increase – about 1.6% compounded growth per year.

–          U.S. production is assumed to increase by 2.8 mbpd (Natural Gas Liquids accounts for 1 mbpd of this) and Canadian production by 1.2 mbpd (crude oil from tar sands production). Given the low political risks and generally supportive environment in North America, these forecasts do seem reasonable. U.S. production is already more than 1 mbpd higher in mid-2014 than in the previous year[7]. The Canadian figure may be a little too high, as the the Canadian Association of Oil Producers forecasts that Tar Sands production will increase by 175,000 barrels per day, each year. This would amount to an extra 1 mbpd over the next 6 years[8]. A pretty reasonable forecast, with some risk of an earlier peak in U.S. shale oil production.

–          The Organization of Petroleum Exporting Countries (OPEC) provides an additional 2.9 mbpd of liquids production: 2.08 mbpd of crude oil, with Iraq providing over 60% (1.2 mbpd) of that growth; 555,000 bpd of condensate and 220,000 bpd of natural gas liquids (NGL) production. Highly questionable assumption about OPEC oil production, with even the IEA noting the significant downside risks due to political issues in Iraq, Libya and Nigeria. Given the current civil war in Iraq, that country could easily see a fall in production rather than a rise.

–          Brazil increases its production by 1 mbpd during the forecast period. The IEA notes that there have been delays in Brazil’s development of its “pre-salt” fields, and assumes that the planned production increases will happen in the 2013-2019 period. Given the technical, financial and political issues affecting the development of Brazil’s oil resources[9], further delays could easily be incurred. Over 90% of Brazil’s current oil production is from offshore deep-water wells[10], which have decline rates of up to three times that of onshore fields[11]. Mearns assumes a 10% overall decline rate, requiring 200,000 bpd extra production each year to offset the effects of depletion[12]. A slower than assumed increase in new field production could mean that Brazil’s overall production remains stable, or at best keeps pace with increased local consumption.

–          Kazakhstan is assumed to increase production by 225,000 bpd, and bio-fuels add another 350,000 bpd. May be reasonable, although the development of the Kazakh Kashagan field has been affected by a host of problems[13].

–          The IEA also makes the questionable assumption that both North Sea, and Russian, oil production will remain relatively stable between 2013 and 2019. The Russian Finance Ministry forecasts that oil production will drop by 6.3 percent between 2014 and 2016[14].Highly optimistic assumptions on North Sea and Russian production rates.

The risks to the IEA production forecasts tend to be on the downside, from political issues in Iraq, possible over-optimism about North Sea, Russian and Brazilian oil production, and a possible early peak in U.S. shale oil production (as forecast by some). Therefore the IEA production forecast can be seen as a “very best case” with significant possible downside risks.

Another issue is that global liquids production is forecast on a gross basis, not taking into account differences in the levels of Energy Return on Investment (EROI). As newer sources tend to have lower levels of EROI, and the EROI of in-place sources tends to decline over time (due to such things as having to inject water or gas to maintain well pressure), the gross numbers are an over-statement of the actual energy provided. As at least some of the increasing amounts of energy utilized to produce the oil is itself derived from oil (e.g. diesel for trucks, excavators, offshore oil rigs etc.), the net production figures will be lower than the gross ones. The inclusion of liquids such as NGLs and bio-fuels also lead to overstatement, as these have lower energy levels (and more restrictive uses) than crude oil.

Another possible downside is that the organizations involved in exploring for, and producing, oil become unable to raise the sums necessary to produce new fields. The newer sources of oil tend to need very large and ongoing financial expenditures due to either rapidly declining well production rates (shale oil), remote locations with incredibly difficult geology (deep sea oil), or remote locations with the need to transform non-oil into oil (tar sands). In the period following the huge run-up in oil prices from 2005 to 2008, the oil majors doubled their exploration budgets, but this did not result in increased oil production[15]. With such failures, the oil majors have come under increasing pressure to reduce their exploration budgets. Any such cuts will reduce the amount of new oil production between now and 2019.

The probability is that the oil intensity of economic growth will be higher than assumed by the IEA, and global liquids production lower (exacerbated by falling EROI and the inclusion of liquids with lower energy intensity). The effects will be felt in the form of reduced global economic growth. These effects will not be felt equally:

–          As per the Export Land Model, the oil exporting countries will tend to favour their own populations (which in many cases are growing rapidly) and thus local consumption will be favoured over exports at the margin. Of the major industrialized regions, North America should be highly advantaged given the increases in shale oil and tar sands production, which will serve to reduce dependence upon net oil imports.

–          As Steve Kopits has proposed[16], the middle-income developing countries (such as China, and many other Asian countries), can pay more for the marginal barrel of oil than the developed nations. Given this, any reduction in available global net exports will be felt most by the advanced industrialized countries that lack, or have declining, oil production. As North American consumers tend to pay world prices for oil (no subsidies, and oil products can be exported), the increase in North American oil production is not doing much to help domestic consumers compete for oil at the margin. Therefore, U.S. growth will be impacted by ongoing high oil prices and the U.S. has experienced relatively weak economic growth in the past few years[17] (and even that may be overstated given the extensive statistical changes over the past few decades that have significantly reduced official inflation figures[18]), with an unexpected contraction in the most recent quarter[19]. In addition, countries moving from being net energy exporters to net energy importers could be affected as they may have no industrial base in place to offset the fall in energy export revenues.

–          To pay for oil imports a country either has to export other goods and services, or run up external currency debts (as oil is still predominantly paid for in US$). In this respect, the highly successful German export-oriented economy (aided by the cheap Euro relative to what a Deutschmark would be trading at), focused on high value and complex products, provides a great advantage.

This Is not good news for the European countries, such as Portugal, Greece, Italy and Spain, that are suffering from post-crisis debt loads and do not have the vibrant German industrial sector. In addition, even the other larger European economies, such as France and the United Kingdom, have not regained their pre-crisis peaks in US$ GDP. This European economic stagnation outside Germany seems set to continue, as shown by recent economic statistics[20],  not allowing the Eurozone to grow out of its debt issues.

 Country                        2008 GDP US$bn                 2013 GDP US$bn

The recent downward 2014 growth forecast in Italy[28] (the Italian economy contracted in the first quarter of 2014[29]), and the banking problems in Portugal[30], show that the European financial and economic issues may have been generally kept from boiling over but are still very much simmering away under the surface. The U.K. economy may also suffer more than most, given its declining energy trade balance, large current account deficit, and high levels of debt[31]. Of course, the issues of rich countries dealing with a lack of growth will be nowhere near those of poorer countries which have, or are, becoming net energy importers. Ones with rapidly growing populations, and/or significant domestic energy subsidies, will be the most affected. Examples include Egypt[32] [33] and Yemen[34].

Another possibility that has been noted by Kopits, is that as the oil price required to make new oil exploration viable continues to increase it may exceed the price at which any economy can profitably utilize that oil. This will result in demand destruction at the margin, further reducing economic growth. Peak oil driven by marginal price.

The global economy, and especially the highly fragile financial system which coordinates it, is only viable in an environment of ongoing economic growth[35]. With the financial system continuing to be on life support (Zero Interest Rate Policy, Continued Injections of Liquidity [QE], central bank purchasing of government bonds, lack of mark to market accounting etc.), any fall-off in growth will rapidly increase financial turmoil. Even more “innovative” government policies would then be required, such as possibly negative interest rates, “bail-ins” (stealing the depositors’ money to bail out the banks), and even greater levels of money creation to drive inflation (to reduce real interest rates and the real value of debts). Without the acceptance that the debt-based financial system needs to be very substantially downsized, to reflect a future without economic growth, such actions would simply be delaying the inevitable wholesale destruction of financial assets.

9 Comments on "IEA Oil Market Forecast: Optimistic Assumptions And An Economy Unable To Grow Out Of Its Problems"

Plantagenet on Fri, 25th Jul 2014 3:08 pm 



Betting the world’s future on ever increasing oil supplies is looking increasingly perilous. Perhaps it might be wise for our leaders to examine alternative economic plans.

Makati1 on Fri, 25th Jul 2014 9:21 pm 



Plant, I don’t see any “alternative plans” to switch to, do you? Communism?

The reality is that this “for profit” capitalist system has to crash into the wall of reality and then a new system will arise from the ashes. I suspect it will look a lot more like communism than anything else. Are there any other non-growth economic systems? Hunter-gatherer?

shortonoil on Sat, 26th Jul 2014 11:49 am 



What the IEA terms as “oil intensity” at first glance appears to be good news. It makes the case that we are getting more, and more out of a barrel of oil. Unfortunately that is not the case. We are not getting more, and more goods and services for each barrel of oil, we are getting more, and more dollars.

At our site you will find Graph# 12 under Study Graphs.

http://www.thehillsgroup.org/depletion2_008.htm

Graph#12 gives the number of gross BTU that a dollar would buy for a specific year. In 1975 a $ would have bought on average 42,348 BTU. By 2010 that same dollar only bought 6,946 BTU. Since a BTU is a constant quantity, and has not changed since a few seconds after the Big Bang, the value of the dollar in energy terms is going down. Energy translates directly into goods, and services. A declining “oil intensity” is not good news. It just means that we are headed for the economic equivalent of a Black Hole!

http://www.thehillsgroup.org/

Northwest Resident on Sat, 26th Jul 2014 12:09 pm 



shortonoil — Going with your analogy, I’d say we are trapped on the outer edges of the event horizon right now. We cannot escape. We are being sucked slowly for now toward the black hole, but picking up speed exponentially. Soon enough, we’ll get sucked into that black hole in a flash. When that happens, our global economy and all the foundations of our modern high-tech civilization will get spaghettified, and those few who survive that crushing evebt will be ejected back out into the universe as individual units of left-over energy to regroup, reform and persist into the future in a completely different form than before.

Northwest Resident on Sat, 26th Jul 2014 1:19 pm 



Let’s take this black hole analogy a little further, since I happen to just love that analogy.

What I haven’t fessed up to on this forum (or hardly anywhere else) is that a few years ago I thought it would be a great idea to fire up my musical skills again and start recording my own music. I ended up recording about six songs with me playing keyboard, lead and rhythm guitar, bass, vocals and using a drum machine for the rhythm.

Anyway, back then was “pre-doomer” mode for me, but you can see a lot of my doomer potential in the words to this song. Imagine the song being sung from the point of view of human civilization, versus any one particular individual.

Song Name: Into The Black Hole

Verse One

I’ve gone one hundred light years through space
Not sure how far left to go
Can’t see where this voyage ends
Guess when I get there I’ll know

How I got here is a story
One that might never be told
I’m taking my story with me
Right into that big black hole

Day by day I’m getting closer
On a straight line no power can bend
Black hole is sucking me inward
On a one way trip straight to the end

I’ve already passed the event horizon
I’m speeding into the great unknown
Time and space warp around me
I’m feeling stretched out and so alone

Wish I could go back and start it over
Wish I could hang on to the things I love
Ain’t .. no .. way ….
I’m near the edge –
I’m going in

Verse Two

That black hole is getting so close now
Stone cold darkness just ahead
Streaks of light go swirling in
Then fade to black again

This is the end of my story
Tales of a life lived in full
Its all that I can take with me
Down into that deep black hole

Strange forces rip and tear at me
Like a rubber band I’m stretching thin
Bright lights flash – its over now
As one more streaking light fades to dim

I’ve already passed the event horizon
I’m sinking into the great unknown
Time and space warp around me
I’m feeling stretched out and so alone

Wish I could go back and start it over
Wish I could hang on to the things I love
Ain’t .. no .. way ….
I’m through the hole – I’m moving on

Davy on Sat, 26th Jul 2014 2:11 pm 



NR, was that you that open up for Bowie in LA a few years ago?

Northwest Resident on Sat, 26th Jul 2014 3:40 pm 



The one that got boo’d out of the joint dodging rotten tomatoes all the way? Yeah, that *could* have been me!

shortonoil on Sat, 26th Jul 2014 6:08 pm 



“spaghettified” ???????

OK, Ok, since you obviously have an artistic bent, somewhere, we’ll write it off to artistic license.

Northwest Resident on Sat, 26th Jul 2014 9:00 pm 



shortonoil — Thanks for granting the artistic license. I do think the word “spaghettified” is a good one to describe — in an analogous kind of way — what I think will happen to our high tech, high consumption civilization in the not too distant future.

If you haven’t studied black holes, then it might be a new term to you — but I can’t imagine that you haven’t studied black holes, so I’ll just make a general point for anybody else who the word might be new to. The astrophysicists and astronomers use that word to describe what happens to information that gets sucked into a black hole. The atoms and particles of atoms of whatever falls into a black hole are stretched out due to the extreme gravitational effects — which is where the word spaghettified gets its usage. Very quickly, that spaghettified matter just dissolves into subatomic particle parts — or so they speculate, they really don’t know for sure.

Without oil, as you’ve often pointed out, our high tech industrial civilization is “stetching its resources thin” and will eventually “dissolve” into its “subatomic particle parts” — which would be analogous to human survivors returning to their hunting/gathering/farming heritage.

I know it’s a stretch. I’m just trying to add a little color to the otherwise bleak facts. If the topic of black holes hadn’t been breached I swear I would never have used that word.

I love your posts shortonoil. Some of the stuff you write really resonates with me. The blunt, forceful truth tends to do that, and you definitely bring it.