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Financial Times Warns of Peak Oil

Enjoy this live version of one of my favorite Midnight Oil songs from the Sydney Olympics before we delve into Peak Oil Theory coming to be.

[click the play arrow in the middle to play the video – I had someone ask so I thought I’d explain]

This story from the Financial Times of London describes why oil production will peak within the year in the non-OPEC countries. They quote a report from the International Energy Agency (usually a champion of the opposite side of the story) as well as various other interesting things. This hits us right as Mexico (one of the top suppliers of oil to the US) changes to an oil importer from an oil exporter. Ultimately, without a coherent energy policy, this country will grow ever-more dependent upon Mid-East oil. Forget Cap and Trade – Washington needs to focus on energy independence for this country which includes renewables, nuclear, domestic natural gas, and high-speed rail.

Anyway, I’m off the soapbox and you can read the story for yourself and determine how you believe it impacts your investing activities. For me, I know it means that energy will be a core holding in portfolios I manage.

IEA warns non-Opec oil supply will peak next year
November 10, 2009 10:00am
by Kate Mackenzie

Non-Opec oil production will peak next year, the International Energy Agency says in its World Energy Outlook.

The IEA also says that post-peak gas fields are declining at a rate of 7.5 per cent, but there appears to be enough recoverable gas reserves to satisfy world demand until at least 2030.

The IEA has been criticised for underplaying the risk of an imminent oil supply crunch. A story in The Guardian today quotes two whistleblowers who claim the agency privately believes oil production will never reach 100m barrels per day, despite its forecasts that world oil demand will reach 105m b/d by 2030.

The WEO repeats the 105m b/d forecast this year, but breaks its outlook into two scenarios: a ‘reference scenario’, in which energy use continues along its current path, and a ‘450 scenario’, in which governments make a concerted effort to limit atmospheric CO2 concentrations to 450ppm.

Under the no-change reference scenario, the IEA sees global oil rising 1 per cent per year, reaching 105m b/d in 2030. This is 1m b/d less than the agency’s forecast last year. OECD demand, in this scenario, will also fall.

Under the 450 scenario, non-hydro renewables rise from 2.5 per cent of the power mix in 2007 to 8.6 per cent in 2030.

Warnings of the no-change reference scenario

The WEO says that investment in upstream oil and gas production is 19 per cent lower this year than in 2008 – which it says could have “potentially serious consequences for energy security”, depending on how governments respond. It warns of price volatility and says:

These concerns are most acute for oil and electricity supplies. Any such shortfalls could, in turn, undermine the sustainability of the economic recovery.

Without any chance in government policy, the report warns, climate change and energy security pose big risks.

Average oil prices will be $100/barrel in 2020 (in 2008 dollars) compared to $60 this year.

OECD countries, although their oil imports will fall under both scenarios, will spend 2 per cent on average on importing oil and gas between now and 2030. Non-OECD countries will spend even more.

Natgas demand to grow

In both the ‘no change’ and the climate change aversion scenarios outlined by the International Energy Agency, natural gas plays an increasingly important role in future energy supply.

In the 450 scenario, world gas demand would grow by 17 per cent in 2030. But that would be 17 per cent lower than in the reference scenario, and demand would begin to fall in some areas after 2020 as low-carbon policies kick in.

In the shorter term, gas demand will grow by 2.5 per cent a year between 2010 and 2015, assuming an economic recovery begins next year. But in a bearish note for gas prices, the IEA says supply growth will outpace demand.

There is adequate natural gas resources to meet ‘any conceivable’ increase in demand, the agency says. There are 850tcm of commercially recoverable gas reserves and only 66tcm of that has been produced (or flared). But costs of production, in the long-term, will rise and half of the world’s existing capacity will need to be replaced by 2030.

The IEA is less confident than some that the shale gas boom in North America will be replicated in the rest of the world:

The extent to which the boom in unconventional gas production in North America can be replicated in other parts of the world endowed with such resources remains highly uncertain.