On November 10, the International Energy Agency (IEA) presented in London its annual “World Energy Outlook” (WEO) — a normally voluminous study of what it sees as the long term evolution of the energy market.

The report will be studied by analysts over and over again for the details it contains and for the fact that the IEA represents the high energy consuming industrial countries where the impact of their policies affect the whole energy markets.

The IEA asks whether we are at “the start of a new energy era” where low prices of all fossil energy are the norm and may still be so for some time to come.

The presentation tells us that by 2040, total primary energy is projected to increase by 3,450 million tonnes of oil equivalent (mtoe), though OECD member-states’ energy demand is projected to fall by 500-mtoe. This is to be expected where energy efficiency targets are followed religiously.

However, this is more than countered by the growth in demand in the rest of the world, with that in India and China expected to be 1,200- and 1,000-mtoe respectively.

Given the way things are, the IEA does not see a substantial improvement in oil prices until perhaps 2020. Opec is not expected to change its position of chasing market share and its policy is beginning to yield some results in squeezing non-Opec supplies.

The Opec Secretary-General Abdullah Salem Al Badri recently said in Abu Dhabi that cutting Opec production to support oil prices “would be counterproductive” as this will “subsidise” non-OPEC producers.

The IEA is saying that “Much more resilient non-Opec supply and higher output from a stable Middle East could hold oil prices close to $50 [Dh184] a barrel until the 2020s”. It adds that if oil prices stay around $40 a barrel, US tight oil may decline by 3 million barrels a day (mbd) by 2020 and less than that if oil prices are higher.

Upstream investment

At around $80 a barrel in 2020, the market is expected to balance. But higher prices will bring back a rise of tight oil production and we could see a repeat of what is going on now. IEA’s Executive Director Fatih Birol, said that overzealous capex cuts in response to low oil prices could sow the seeds of a future oil price spike where IEA expects upstream investment “to be at least 20 per cent lower than last year [and] continue to decline next year”.

He added that in the next ten years “the amount of money we need just to compensate decline at existing fields is in the level of $650 billion, because decline rates are becoming steeper.”

As far as oil demand is concerned, the IEA sees a decline of OECD demand by about 10-mbd by 2040 against an increase of 22-mbd in the rest of the world, and especially in China, the Middle East and India where demand is expected at 15.3, 11.1 and 9.8-mbd respectively.

One of the highlighted points in the IEA presentation is the advance in renewable energy supply, “driven by continued policy support” where it will “account for half of additional global [electricity] generation” by 2040.

The cost of renewables is falling while oil and gas cost may fall somewhere and rise somewhere else. Perhaps on average, it will rise. Renewable electricity supplies are expected to increase from 5,500-TWh in 2015 to 14,000-Twh in 2040 and surpassing coal-supplied electricity by 2030, which will increase from 9700 to 11800-TWh in the same period.

Even gas, the abundant and most favoured fuel, will increase its share of electricity generation from 500 to 9,000-TWh, while nuclear electricity is expected to rise from 2,500 to 4,500-TWh. Poor oil is expected to lose half of its current contribution of 900-TWh.

Rebound in prices

Although low prices are beneficial to consumers, but “can also sow the seeds of future risks to energy security”, the IEA says. A prolonged period of low oil prices for decades “will see a rebound of prices and greater reliance on the Middle East”.

“Today 50 per cent of global exports are from the Middle East. If prices stay at $50/B, this will jump to 70 per cent with most of the volumes headed for Asia.” Said Fatih Birol.

However, the IEA hedges its position by lessening the likelihood of this to happen due to producers’ need for revenue and the rise of oil demand driven by low oil prices. World oil demand is expected to grow to 95.9-mbd by 2020, up by 5.3-mbd from the level of 2014.

With oil prices now close to $44 a barrel for Brent and $38 a barrel for the Opec basket of crude oils, we have an uphill battle to reach the seemingly consensus price of $80 a barrel.

The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.