IEA Confirms non-OPEC Production Peak Imminent
Ever since July 2007, the International Energy Agency (IEA) has taken the concern of people like me a lot more seriously. A mix of geologists and energy observers have been worried about a potential oil supply future where production hits a plateau and even declines by the late 2010s. IEA calls for demand reduction and supply investment have gotten louder and louder as the months pass by. And today, IEA chief economist acknowledged that we are within two years of the peak in production of non-OPEC conventional oil. This means, as previous blogs have conveyed, that we will become dependent on OPEC producers to have any increase in (or even to maintain!) global oil production. Such a future would make oil consumption a zero-sum game amidst scarcity where consumers bid the price up until others decide that such a price isn’t worth it to them. For the global rich, this may mean trading in an SUV but for the global poor it may mean the deprivation of electricity, heat or even food imports.
A quick review of OPEC’s interest shows that relying on the cartel to increase their share of global production from ~40% today is a precarious consumptive future. Similar to a monopolist, their optimal action is to curtail production until the point where demand becomes unit elastic. With the extreme inelasticity of oil demand (since there are few substitutes for most of its uses), this point could be as high as $250 per barrel or more. It is thus my opinion that we should prepare for oil at $250-$300 per barrel as we plan for the future. If the price of oil falls toward $100 per barrel in the coming months due to lower US consumption, that doesn’t mean we should go back to business as usual. It just means that a recession in the world’s largest consumer of oil does indeed take pressure off of the tight oil market. An economic recovery in the US would bring new record prices very quickly unless one thing happened: Our best hope to weather the storm of a peak in non-OPEC and potentially global oil production is to kickstart a sustainable energy revolution that is buttressed by advances in efficiency and an acceleration of wind and solar power deployment. Governments, from the municipal to the national level, should shift their priorities in this direction — planning communities that foster efficient transport of goods and people will be crucial. The market will help in this transition, but allowing the amoral invisible hand to do all the work could erode social cohesion and cause unnecessary hardship throughout the public. To be ready, we need to shift public funds from expanding airports, constructing new highways, and subsidizing suburbia to building more bike lanes and pedestrian pathways, supporting research for efficiency and plug-in hybrid electric vehicles, and connecting communities to top-notch communication tools that reduce the need to travel. If the IEA is this alarmed, we all have a lot of work to do. Good luck, and please let SET know how we can help you as you navigate your sustainable energy transition.