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Energy Agency Sets Grim Oil Forecast
IEA Says World Dependency Needs to Be Scaled Back; More Price Pressure Is Seen
By SELINA WILLIAMS and BHUSHAN BAHREE, THE WALL STREET JOURNAL, November 8, 2005

The International Energy Agency, in an unusually stark call for change that reflects rising anxiety over future energy supplies, urged the industrialized world to start weaning itself off oil.

The Paris-based energy watchdog for the U.S. and 25 other wealthy nations yesterday raised its long-term forecast for oil prices by as much as one-third and painted a pessimistic picture of the future economy if global use of oil and natural gas isn't reduced.

The IEA's call for change is especially notable because the agency is a mainstream economic agency whose views reflect a consensus among experts from the U.S., Japan and other member states. The report is the latest evidence that the continuing rise in energy prices and growing volatility in the Middle East are altering the conventional wisdom on the future of the world's energy use.

In its World Energy Outlook through 2030, the IEA warned that governments in the oil-rich Middle East may constrain energy-production investment in a quest for higher prices. Persian Gulf states are critical to future oil supplies, as the region contains two-thirds of the world's known reserves and is growing ever more critical as fields in the West dry up.

Even if Middle Eastern states do develop their oil resources, the IEA said it is uncomfortable with growing dependence on the region's energy. "This is not a sustainable energy future," Fatih Birol, the IEA's chief economist and principal author of the study, said in an interview. In the group's so-called reference scenario, in which countries invest as recommended by the IEA, "we are ending up with 95% of the world relying for its economic well-being on decisions made by five or six countries in the Middle East."

In the past 30 years, Mr. Birol said, there have been 20 oil-supply cutoffs of more than 500,000 barrels a day -- 17 of them in the volatile Middle East.

The world now burns about 85 million barrels of oil a day. Because supplies are tight, small supply disruptions can send prices soaring, as happened after this year's hurricanes in the Gulf of Mexico.

The IEA also expressed anxiety about the effects on the climate of the growing use of hydrocarbons. Carbon emissions, which are thought to contribute to global warming, are expected to rise by 50% in the next 25 years. The IEA proposed greater use of renewable resources such as wind power, and more nuclear power, to reduce dependence on hydrocarbons.

The IEA sketched two scenarios for prices through 2030. Its deferred-investment scenario looks at what will happen if producers in the Middle East and North Africa don't immediately increase investment substantially. The average price of crude oil imported by IEA members would be unlikely to fall at all by 2010 from current high levels, and would rise to an assumed price of $86 a barrel in nominal terms by 2030, the IEA said. U.S. benchmark crude oil, which trades about $5 a barrel over the benchmark used by the IEA, was at $59.47 a barrel late yesterday.

If the region begins investing as recommended by the IEA, the agency says prices could average $65 a barrel in 2030, lower than in the worst-case scenario but still well above the level of $20 to $30 a barrel in the years before the current high prices. To meet rising world demand, oil producers in the Middle East and North Africa need to raise their average annual investment in oil projects to $23 billion from now until 2030, up from about $15 billion currently, Mr. Birol said.

He cited Saudi Arabia, owner of the world's largest reserves, which he said has enough reserves and capital to raise its output to 18 million barrels a day by 2030. Saudi Arabia is expanding output capacity to 12.5 million barrels a day by 2010, from about 10.5 million barrels a day currently. The kingdom has said it can pump 15 million barrels a day for 50 years, but hasn't yet committed to pumping at or above that level.

One bright spot for consumers is natural gas. The price of gas has tended to rise and fall in line with oil over the years. But the link between the two has been easing and is expected to weaken further, the agency said, thanks to the liberalization of energy markets and the creation of global markets for natural gas.

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