Friday, November 30, 2012

Some Caveats on IEA’s Ambitious Forecasts

The International Energy Agency (IEA) issued its flagship World Energy Outlook (WEO) report this month, which emphasized three main game-changers of the world energy landscape to date: explosive development of unconventional oil and gas in North America, increased Iraqi oil production, and energy efficiency. Presenting the report at the Carnegie Endowment for International Peace on November 27, 2012, IEA’s chief economist, Fatih Birol, stressed that the “foundations of the global energy system are shifting, with implications on everyone.” Rapid developments of unconventional oil and gas in the U.S. and Iraq’s oil production have played an important role in this shift. In fact, the most interesting point of the report is the ambitious projection for the U.S. and Iraq. Fatih Birol said that the U.S. will overtake Russia and Saudi Arabia in oil production by 2017, noting that while the U.S. may become the largest oil producer, Saudi Arabia will continue to remain the largest exporter of oil. Meanwhile, Iraq would account for 45% of the growth in oil production by 2035, according to IEA.

But these projections may be too modest, at least according to Leonardo Maugeri, a former Eni SPA executive who is currently a fellow at the Harvard Kennedy School’s Belfer Center for Science and International Affairs. Maugeri argues that oil production levels in the U.S., Iraq and Saudi Arabia could be much higher than what IEA predicts in its WEO report. Basing his statements on studies he is currently conducting, Maugeri believes that Saudi Arabia’s “production capacity would still be higher than that of the U.S., but probably the Saudis will not exploit it fully, in order to support oil prices.” Similarly, he believes that IEA’s projected oil output of 6 million barrels per day by 2020 was low and the Agency “seems too cautious about effects of investments and new production technologies.” In short, the world has not run out of oil; rather the opposite, it may be entering the era of oil abundance.

Clearly, energy abundance is good news. But there are a few important caveats. The long-term future and implications of the revolution in technology, namely, hydraulic fracturing and horizontal drilling, that changed the U.S. energy landscape overnight, are likely to be less concrete than they seem at the moment. We do not know what kinds of regulations await the development of unconventional energy sources down the road if there is a serious accident or if the industry fails to win the tenuous public trust due to poor environmental practices. There is ongoing tension between the energy industry and communities in the U.S. that resist drilling of shale gas and oil on their territories.

The future of Iraqi oil is also uncertain given the many challenges it faces, ranging from domestic divisions and grave security problems to geopolitical threats (influence of Iran, competition in energy markets with Saudi Arabia, split of the northern Kurdish region, dependence on water supply from upstream neighbors to support oil production). Iraq still sorely lacks the hydrocarbon law, which is crucial to the development of its energy sources. So perhaps, it is wise to be less ambitious in making projections on production levels of energy in the U.S. and Iraq, which are in abundance, but are as much subject to sound policies as they are to wildcards. Most importantly, we should not be blindsided by the abundance, but put emphasis on energy efficiency. A sound energy policy in any country cannot be without energy efficiency given the ever growing energy demand, rising world population as well as concerns over climate change, something that Fatih Birol strongly emphasized in his presentation this week.

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