Dr. Fatih Birol, the IEA’s new Executive Director, presented the Association’s outlook for energy and oil prices this morning at Columbia’s Center on Global Energy Policy. Highlights include a rebound in the price of oil to $80 per barrel by 2020 and the expectation that renewable energy will account for over 50% of energy production by 2030.
While oil may be range-bound in the short-term, oil below $50 is uneconomical for US shale oil producers, forcing an inevitable cut in oil production in the United States. As a result, the IEA expects that global oil investment will decrease by 20% in 2015, followed by another year of decreasing investment in 2016. Dr. Birol pointed out that two straight years of declining oil investment is very rare. However, energy consumption is expected to continue to grow in the developing world, particularly in India over the long-term. In fact, the IEA expects India to consume the same amount of energy as the United States by the year 2040. So despite the fact that energy consumption in the EU, US and Japan will actually fall slightly as the regions become more energy efficient and population growth slows, overall global demand will increase.
Dr. Birol also pointed out that a $50 oil may not be as desirable for the world as it may first appear. $50 oil would mean a greater dependency on traditional OPEC producers whose production costs are among the lowest in the world, but many of who are politically unstable. Lower oil prices threaten that stability even more. Low oil prices also decrease the emphasis on energy efficiency, further exacerbating the world’s carbon emissions.
On the brighter side, the dominance of coal burning energy is receding and renewable energy should account for the majority of energy production by 2030. That means tremendous investment for solar, wind and other renewable energy, up to $13.5 trillion through 2030.
Christof Ruhl, the Global Head of Research at the Abu Dhabi Investment Authority, was on hand to provide an alternative view point. He argued that the IEA global growth estimates may be too rosy, leading to more sluggish growth in energy consumption and oil stuck in the $50 range for a longer period. He also suggested that a carbon tax may be the only way for the use of renewable energy to grow more quickly in a world of low oil prices.
Mr. Ruhl’s analysis makes sense in the short-term. With the ability of shale producers to quickly expand production as they did this past summer when oil moved back into the $50 range, we see little room for oil to move above $55 per barrel in the intermediate term with a glut of oil on the supply side. It will take the inevitable creative destruction to weed out the smaller players in the shale oil patch before investment can move forward in a more measured pace. While opportunities will appear over time, we think energy investors are stuck on the sidelines through the first half of 2016.