Drastic cuts in oil industry investment risk creating a shortfall in supply that by 2020 will expose the market to a surge in prices, the International Energy Agency has warned.
Despite a chorus of analysts predicting a decline in oil consumption in the coming years, as governments push for energy efficiencies, cleaner fuel usage and electric cars, the IEA cautioned in its five-year outlook: “We see no such peak in sight.”
More investment in global oil and gas exploration and production is crucial to ensure future supplies are able to meet growing demand, it added.
The oil price crash that sent prices from $115 in 2014 to below $30 early last year forced international energy companies to curb investment by a quarter in 2015, and by a similar amount last year.
The Paris-based agency said only modest signs of recovery in 2017 meant that it was far from clear that enough projects would enter the pipeline in the next few years to avoid a supply crunch.
“We see significant risk of prices rising sharply by 2022, unless a significant amount of new projects are sanctioned and sanctioned quickly,” Fatih Birol, executive director of the IEA said at the CERAWeek energy conference in Houston.
The forecast comes even as the oil market grapples with an excess of inventories and US production is set for a revival. The shale oil industry alone could not meet growing demand, the IEA said.
It was years of prices above $100 a barrel that unleashed a wave of high-cost oil supplies, causing a downturn in prices since 2014 that battered the economies of producer nations and roiled the share prices of energy companies.
Brent, the global benchmark, traded at close to $55 a barrel on Monday.
By not investing in longer-term projects now, volatility in the oil market could increase, the IEA said. “It is not too late to avert a supply crunch.”
In the short term, a deal to cut supply between Opec and big producers outside the cartel such as Russia has spurred shale companies to increase drilling activity. A drop in their costs has also helped. US shale drillers saw reductions of 30 per cent in 2015 — double the global average — and 22 per cent in 2016.
“This also gives a clear indication that many are capable of positioning themselves to raise production in a lower price environment,” the IEA said.
Even energy major ExxonMobil has said it will put half of the company’s investment in oil and gas production into “short-cycle” projects, such as shale oil, that could generate positive returns within three years. President Donald Trump’s administration could also support policies that boost US oil production.
Although the next couple of years suggest supplies will be adequate, it is in the latter part of the IEA’s forecast period where the oil market faces a shortage.
Unless more projects are given the green light soon, demand for Opec crude will rise from 32.2m barrels a day in 2016 to 35.8m b/d in 2022, the IEA predicts. The amount of spare oil on hand to meet a crisis will drop below 2m b/d.
As global economic growth accelerates and air travel picks up, world oil demand is expected to grow on average by 1.2m b/d each year to 2022, in spite of vehicle efficiency standards becoming stricter and government support for electric cars increasing.
Mandatory fuel economy regulations now cover three-quarters of global passenger vehicle sales and are having a significant impact on oil consumption, but the IEA said while demand growth may slow it will not reverse.
Meanwhile, the total stock of electric vehicles is expected to hit 15m by 2022, up from 1.3m in 2015. Despite robust growth, the IEA says electric vehicles’ share of the total number of vehicles remains small and will only replace 200,000 b/d of oil demand over the next five years.