IEA Chief Fatih Birol Spills Beans At CFR Meeting

Jim Brown
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Actually it was not beans but the details of the IEA 2009 World Energy Outlook, which was released last month. This is a high dollar report they sell for 120 Euros. ($180 dollars at today's exchange rate)

Mr. Birol worked at OPEC for six years and has written dozens of articles on energy and energy policy and won awards for his work. He is a very technical analyst and knows global energy demand and consumption inside and out. When he speaks we should listen. That is quite different from prior IEA heads or the people at CERA.

According to these were the interesting points.

  • To keep up with global oil demand, the world will need to discover an additional four (yes, he said four) Saudi Arabia?s worth of crude reserves before 2030

  • To keep up with global gas demand the world will need to discover an additional four Russia?s worth of natural gas reserves by 2030.

  • Because of the financial crisis, global investment in oil production fell by $90B in 2009, or 19 percent- the first time this has happened in a decade.

  • Existing oil fields will lose two-thirds of their productive capacity by 2030

  • Between 2008 and 2030, the percentage of GDP spent on energy in the US will double, and in countries like China and India could increase three to six-fold.

  • Oil prices were "not innocent" in precipitating the financial crisis of 2008 and will remain a threat to global growth.

Fatih Birol

This is the main man at the world's foremost think tank on energy. If he says it the odds are good it is real. This is a major change from the IEA of 4-5 years ago claiming we would have plenty of oil to 2030 and beyond. Obviously their individual survey of over 800 major fields in 2008 has put the fear of God into them.

Let's take those points one at a time. Discovering four Saudi Arabia's worth of crude is an impossibility. The mega fields in Saudi Arabia have produced over 10 mbpd for decades. Sometimes more, sometimes less depending on the demand but it was always there. To find four more country-sized fields of 10 mbpd each is simply impossible. The entire globe has been scoured top to bottom for geological formations capable of containing oil. The only new deposits of any size are in the very deep water and in very harsh environments. The sub-salt Tupi find in the ocean off Brazil is in 4500-7500 ft of water and another 15,000 ft of salt and rock. It is very difficult to drill and produce. Brazil is talking about 1.0 to 1.5 mbpd at max production 5-10 years from now. There may be more oil fields to be discovered BUT they are not country-sized. Saudi claims they have 270 billion barrels of reserves left and that is after pumping out over 130 billion barrels over the last 50 years. It would take centuries for the Tupi field to pump that much oil and that is the biggest discovery in the last 30 years. Saudi Arabia is roughly one-third the size of the USA. Don't you think if there were oil deposits of that magnitude the Exxons and BPs of the world would have found them? There are no country-sized fields left to find.

Natural gas is everywhere. There is a glut of gas. Yes but that glut is temporary. Russia is the number one gas producer in the world. Almost all of Europe is heated and electrified using Russian gas. For Mr. Birol to say we need to find four more Russia worth of gas by 2030 demonstrates how quickly the current gas glut can disappear. The reason it will disappear is that it is cheap today and every country with access to gas is racing to build gas generating plants to replace their dirty coal plants. The glut is only temporary but gas prices will only get cheaper before they begin their eventual climb. The gas glut in the USA is the result of the race to produce shale gas. The new hydrofracking process is opening up gas reserves we could not extract before. Birol believes the glut will peak in 2015.

Mr. Birol claims that global investment in oil production fell by $90 billion in 2009 or -19%. Some areas were worse and some not so bad. This is the first time in the last decade that investment in production declined. Hundreds of projects small and large were canceled or delayed until conditions improve. For many those conditions may not improve for a long time. Many smaller companies rely on loans and investors to develop new projects. Nobody is loaning big money today. Banks have tightened their standards and are hoarding cash. Until money loosens and oil prices begin to move over $75 the odds are good that new investment into exploration and production will be limited. This is going to create a massive drop in new production coming online 3-5 years from now. Without the exploration to find the oil and the investment to produce it there will be a sharp drop when that window extends into the producing future.

This next point is a good one. Birol says existing oil fields will lose two-thirds of their capacity by 2030. If our current production capacity is 88 mbpd then losing two thirds will knock us back to less than 30 mbpd. I wish I could pause your thought process here to let that thought sink in. That means we have to find and produce nearly 60 mbpd of new oil over the next 20 years JUST TO STAY EVEN. The average amount of new oil brought online each year is around 2.0-2.5 mbpd. Sometimes less, sometimes more. However, most production comes on at a high rate as the fields are drilled out in the first 2-3 years. Then they begin their permanent decline that can last 20-40 years. The point is that we get a big burst of oil at the beginning and then the decline begins. To think we could find and produce 60 mbpd of sustained production over the next 20 years is the equivalent of the cow jumping over the moon.

Next he said, "Between 2008 and 2030, the percentage of GDP spent on energy in the US will double, and in countries like China and India could increase three to six-fold." The percentage spent on energy will double. I think is has drastically understated this problem. That would roughly translate to $6 per gallon for gasoline at present GDP levels. Our current GDP is just under $15 trillion. Assuming a tame 3% average increase in GDP per year by 2030 our GDP would be close to $34 trillion. The latest year I could find was 2006 where the percentage of GDP for energy was listed as 8.8%. If our percentage will double that turns into 17.6% of a $34 trillion GDP or nearly $6 trillion on energy. This compares to only $1.15 trillion in 2006. Crude oil averaged $58.30 per barrel in 2006. Now we don't know if Birol was being kind in his projections because he knows we will consume significantly less energy by 2030 due to price rationing or if he just did not want to rock the boat with a real number.

Lastly, "Oil prices were not innocent in precipitating the financial crisis of 2008 and will remain a threat to global growth." I sat through several presentations recently outlining how the rising oil prices had squeezed the excess cash out of consumers pockets in the form of gasoline, heating oil, natural gas and increased electrical bills due to nat gas. Corporations were squeezed because of transportation expenses, higher oil prices and manufacturers depend on cheap nat gas. That went to $12 and many plants physically shut down because they could not afford to produce goods at that price. Most consumers and quite a few companies live on the edge of insolvency. They race the checks to the bank and live just under their means. When energy costs went up several hundred dollars per month for everyone it sucked that discretionary income out of their pockets and then started extracting money needed to pay the bills. Consumers still had to commute to work but at $4 to $5 gas their fuel bills doubled or even tripled in some cases. This was a additional cause of the subprime crisis because it pressured mortgage payments. It may not have been the primary cause but it was definitely a contributing factor to the recession.

I have run out of space for this article but you get the picture. The IEA has turned from skeptic to believer in three short years and now they are preaching reality and nobody is listening. Naysayers used to preach the IEA oil abundance claims on every street corner. Now that the IEA has seen the light they are ignored by the mainstream press.

We will not ignore his claims. We will profit from them!

Jim Brown