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12 Jun 2008

Fatih Birol Offers the World an Oil Health Check, and the prognosis isn’t good.

The International Energy Agency used to have the role of being the energy optimists, reassuring Governments and markets that there would be sufficient supplies to keep the world sufficiently fueled for the foreseeable future. Indeed, it is still one of their wildly outdated and wildly optimistic forecasts that still underpins the UK government’s absurb assertion that oil will cost $67 a barrel in 2020.

Every year the IEA publish their ‘World Economic Outlook’, which gives their assessment of where the world is in terms of oil and other energy supplies. Last year’s talked of a ‘supply crunch’ in 2012. This years has been based on their going back to the data and reassessing the state of the world’s supply. What they have found has clearly shocked them, and already IEA Chief Economist Fatih Birol, a man with the perfect hang-dog glum expression to be breaking this news, is doing the rounds preparing people for the forthcoming report.

What follows is an interview he gave recently in International Politik, the Journal of the German Council on foreign Relations. If ever there was an example of a man with bad news to break breaking it in the most straightforward way possible and not mincing his words, this is it. Essential reading.

The International Energy Agency gives the alarm: The world could run out of oil faster than expected – the danger of a supply shortage is rising.

Hunger for energy vs. energy shortage: While the demand for oil is on the rise, the production is decreasing – shortages, escalating prices and inflation are looming. When talking to energy politician Astrid Schneider, Faith Biro, chief economist of the IEA demands a change in policy from the member countries. His motto: leave oil before it leaves us.

Astrid Schneider:

Mr. Birol, in your “World Energy Outlook” which was published in November 2007 the IEA has warned for the first time that there could be a slump in oil production and escalating prices in the time from now to 2015. The reason you give is that there has been to little investment in oil production.

Fatih Birol:
Indeed. There are three reasons why that is so. The first one is the increasing demand, mostly from China, India and the Middle Eastern countries themselves. These countries are the main reason for the increasing oil consumption. Even if there should be a recession in the USA, this would not slow those countries down much, because India and China have a strong internal economic growth, while high oil prices will help the economy in the Middle East. The demand for oil will therefore remain high.

Schneider:
The second reason …?

Birol:

… is, that we see a sharp decline in production from the existing oil fields, especially in the North Sea, the USA and many non-OPEC countries. Even here money should be invested, to slow down that decline. The third reason why we expect a risk for overall production is, that we looked at all oil exploration projects around the world: 230 altogether, in Saudi-Arabia, Venezuela, the North-Sea, everywhere. Even if all those projects which are already funded will be implemented, the overall capacity they can bring for new oil production is too little.

Schneider:
How much is missing?

Birol:
Exactly 12.5 million barrel a day are still missing, about 15 % of the global oil demand (the current global oil consumption is 84 million barrel a day, note from the editor). This gap means that we could face a supply shortage and very high prices during the next years.

Schneider:
Is there still a way to avoid this?

Birol:
There are only three ways out of this dilemma: First of all we have to increase energy-efficiency drastically, we have to build more economical cars, trucks and airplanes, to slow down the incline in oil consumption. Secondly we have to use more alternative fuels in the traffic sector. If you take a look at how little governments are doing to help higher efficiency, though, I have little hope that there will be such a change of policy. The third thing is that we need many more oil production projects, especially in the key countries in the OPEC.

Schneider:
You write that 5.4 trillion dollar have to be invested to meet the global oil demand. In which countries should this money be invested?

Birol:
In the Middle Eastern countries with a large oil supply – but I am not sure that those countries and their oil corporations will invest as much as would be necessary. They might think that it is not in their own interest to raise the production that much, to keep the oil prices up. A further part of the investments has to go to the OPEC countries, to the USA and to the North-Sea, to prevent the decline of the oil production there.

Schneider:
In the WEO 2007 it is mentioned that the rapid decline of oil production will be between 3.7 and 4.2 percent per year. Is that right?

Birol:
Exactly-

Schneider:
This decline is even steeper than the one predicted by the Energy Watch Group!

Birol:
I can already tell you that in our “World Energy Outlook 2008″ which will be published in November we will deal in depth with the prospects of the oil and gas production. We will take a look at the 350 most important oil and gas fields and explore how much production rates are sinking and what that means.

Schneider:
What do you mean by that?

Birol:
As far as I know this will be the first profound public study in which we verify and revise our knowledge about how much oil and gas is going to the markets. Many people will come to new conclusions about this.

Schneider:
One of the statements of the WEO 2007 is that the complete additional oil production has to come from the OPEC countries and especially the Middle East. Salem el-Badri, the general secretary of the OPEC has announced on a conference regarding energy security in London last February, that the OPEC wants to invest 200 billion dollar until 2012 to create new production capacities of 5 million barrel (mb) a day. This is a sharp contrast to the WEO 2007 where you state that to the year 2020 we need 24 mb per day in new production capacity to satisfy the rising demand for oil. So de facto Salem el-Badri says that the OPEC will not be able to meet the expectations. Doesn’t that mean that we will run into serious problems?

Birol:
Indeed. this is the reason that this year for the first time we announce a “supply crunch” situation. There is a gap between the global demand for oil and the amount which is or can be brought to the market from that region. We think that the oil producers have to increase their production output significantly, but we are not sure that they will do it or even can do it.

Schneider:
Because they don’t want to?

Birol:
Let’s look at the numbers: up to 2015 there will be a gap between what we expect and what the oil producers are willing or able to do to increase their capacity. This gap shows the real and serious picture of the oil market. It could mean a supply crunch and escalating prices.

Schneider:
So the things I see in the WEO are more – if I may say so – a wishlist?

Birol:
You could put it that way. I think we are entering a new world oil order. The new players, which decide how much oil is going to the markets, are mostly public oil companies. For many reasons things will not be as easy as they have been before.

Schneider:
The Energy Watch Group has pointed out in its studies that the oil reserves in the Middle East are likely estimated 50 % too high. When you ask the Middle East countries today to increase their production capacities, how good is your knowledge on their oil reserves and on the amount those countries could produce if they wanted to?

Birol:
We are talking about a very important issue here and the most important accomplishment I expect from the WEO 2008 is more transparency as far as the oil reserves of the national as well as the international oil corporations is concerned.

Schneider:
Who are you hinting at?

Birol:
Just remember that a very well known international oil company has recently run into trouble because it did not have enough transparency. Therefore the IEA would like to see more openness in accord to data about oil reserves – it might be the national good of the individual states, but the rest of the world, other economies, the common wellbeing of everyone are dependent on it. At the moment we are flying almost blindly and we desperately need more insight here.

Schneider:
Does transparency alone help?

Birol:
Even if the oil reserves of Saudi-Arabia should be estimated wrongly by 50 %, they could increase their production from 12 mb a day to 18 mb. But I don’t think they will raise production that much in the next 25 years. So there are mainly three different problems: geology, investment and policy of the main oil producers. Those three aspects taken together make the future of oil very difficult.

Schneider:
If I look at all those countries, there are big problems with Russia and its restrictive policy against international and market oriented oil corporations like Yukos; Iran and Iraq are international crisis hot spots, Saudi-Arabia has a very reluctant policy and seems to be difficult to approach for western companies …

Birol:
Indeed, but that is completely legitimate.

Schneider:
… and last but not least Venezuela which has just stopped its oil exports to the energy corporation Exxon Mobil. These countries together hold 60 % of the world’s oil reserves. But de facto we have no access to them, neither politically nor economically.

Birol:
That causes great strain on everyone and on our economic systems. When I look at the future, I see three strategic challenges in the energy sector: The first is oil and gas security. Just recently Russia has lowered its gas delivery to the Ukraine by 25 %. The second is climate change. And the third, and one has to admit we don’t much talk about this, is the connection between energy and poverty, for example in Africa. Today 1.6 billion people, that is 40 % of the global population, have no access to electric power.

Schneider:
Will we be able to meet all three challenges?

Birol:
If you look at the dimensions, I don’t think that the markets alone can solve those problems. We cannot leave everything to them. The national governments as well as international institutions have to help to define the rules and follow them. The issue is too important.

Schneider:
You are not alone with your warnings about supply shortages – at the world economy summit in Davos Jeroen von der Veer, the Shell CEO, admitted for the first time that conventional oil and gas will not suffice to cover world demand from the year 2015 onwards. Will this not lead to a further decline in production?

Birol:
Several people now think that the global oil and gas production will get into troubled waters soon, but this is not only due to resource depletion. The lack of investments are another problem, as well as the fact that some countries don’t want to increase production.

Schneider:
For which we cannot blame them, can we?

Birol:
No. Before I joined the IEA I worked for the OPEC in Vienna. And every oil person had the same thoughts: I don’t use up all the oil that I have today, but leave some for my children and grandchildren, so they will be able to make money from it as well. And I understand that. In many oil producing countries, oil is the sole or at least most important source of income.

Schneider:
So what is your conclusion?

Birol:
I would be very surprised if the oil productions would effortlessly increase during the next 20 to 25 years to meet, lets say, 120 mb a day without any problems. Even if the potential should be there, we will not get this oil to the markets. The conclusion is that we have to be prepared to see very turbulent, tight and high prices oil markets – this will not be good for the economy.

Schneider:
Let’s assume the prices escalate – who will be hit first?

Birol:
It will be about who can afford x dollar per barrel. Some will be able to, others won’t. The OECD countries will be among the lucky ones, but the developing countries will …

Schneider:
… be the losers …

Birol:
Exactly!

Schneider:
If I understand you correctly, you say that the demand for oil could rise 3 % globally every year, while we have to expect a decrease of 4 % in oil production in the time from now until 2015. That would be 7 % each year which are missing.

Birol:
The demand might increase a little slower. But there could be a large gap between what should be there and what actually will be there, especially if we do not put massive efforts into improving the efficiency of cars or change to other transportation systems. If we don’t take measures on the consumer side, the consumption will continue to grow. And if we have not invested enough into oil production, we will flounder.

Schneider:
But when you think of the life cycle of goods, of the long investment cycles of machines, power stations or air conditioning systems: do you think an adjustment of the consumer side to a lower supply path could be done that fast?

Birol:
No, but I don’t think that prices will go up that rapidly. We can see a gradual incline and that will give the people some time to adapt. But on the long run it has to be clear: if oil will be gone by 2030, or in 2040 or 2050 does not change much.

Schneider:
You really say that?

Birol:
Yes, one day it will definitely end. And I think we should leave oil before it leaves us. That should be our motto. So we should prepare for that day – through research and development on alternatives to oil, on which living standards we want to keep and what alternative ways we can find.

Schneider:
How will the global economy react to a new oil crisis?

Birol:
If there is a great gap between supply and demand, the economies will be hit hard – yet with large differences worldwide. The German economy will suffer less than that of the Sahel Zone countries. Nevertheless we expect less economic growth, rising inflation and more unemployment for the OECD countries as well.

Schneider:
And the poor countries?

Birol:
In the poor countries, most of all in Black Africa, in India and similar countries, the effects will be much more devastating. We have calculated for example that the oil importing countries in Black Africa have lost three percent of their economic growth due to rising oil prices. We should not forget that half the people in those countries live below the poverty line of one dollar a day.

Schneider:
Do you see the danger of military conflicts between countries with high and low resources, caused by the tension on the world market?

Birol:
In my official mandate I don’t often speak about wars and such. But what I can tell you is, that energy issues and geopolitics are interwoven too much. The energy supply is becoming less and less an economic enterprise, but instead an economic enterprise plus geopolitics! That’s bad news, and I don’t like that at all. We need a dialogue between the producers and consumers.

Schneider:
You mentioned that we are at the eve of a new world energy order. Who are the new players?

Birol:
On the consumer side clearly China and India. They used to be very small participants in the market and we did not see much of them in the energy game so far. They have been mere street players but now they are growing more and more into full sized protagonists.

Schneider:
And on the producers’ side?

Birol:
There it is the major oil producing countries: Saudi-Arabia, Iran, Iraq, Kuwait, the United Arab Emirates and Russia. All those countries have one thing in common: the oil production is regulated by public oil corporations instead of the free market. That changes the game setup. They are not only new players, but it is a completely new situation. The rich OECD countries become less and less relevant. They are still important, but they will play a lesser role when we look into the future.

Schneider:
So the whole world economy depends on a few oil producing countries – and those countries you mentioned are not very democratic.

Birol:
Every country has its own political system which it should have set for itself. What we would like to see, though, is the opening of the markets of those countries. The free flowing of capital will be very important, so that everyone is free to invest in what he wants. But in the end these countries are free. They can decide what energy policy and political system they want.

Schneider:
What does that mean for us?

Birol:
At least we have to realize, that our oil and gas will come from countries where public corporations decide about production in the future. That is different from the past when more market oriented corporations did supply us. That is an important change.

Schneider:
The IEA has the mandate to keep watch over the oil market and to warn the OECD countries when there could be problems or shortages on the global oil market. How loud are your alarm bells ringing by now?

Birol:
We are talking about two different functions here. The first is that we can put reserves to the market when there is physically not enough oil to meet the demand. We did that in 2005 for example when the hurricane Katrina hit the USA. The second task is, as you have mentioned, to “sound the alarm”. That’s what we have done last year.

Schneider:
You already did ring the bell? When?

Birol:
With the World Energy Outlook 2007. It was a clear signal to the governments of all our member countries. They take energy and oil security much more important than before, now. And when we present the WEO 2008 this November, I think it possible that the sirens will shrill even louder.

Schneider:
But don’t you have a process to call together the heads of state or the ministers of economy to talk to them about an oil supply crisis?

Birol:
We do have processes like that for a supply crisis. We call this an emergency situation and we can exchange information with the governments of all member countries in only a few hours time if that happens. We did that when Katrina hit.

Schneider:
Don’t you see a difference there? On the one hand a crisis which is caused by a natural catastrophe which destroys some oil platforms and on the other hand something like a “longtime emergency”?

Birol:
Yes – and that is the reason we asked our member countries to switch policies. Just recently the USA and Japan did pass new bench marks for cars to reduce the energy consumption. We desperately need new rules and standards here. Europe is trying to meet the same standards at the moment, but I know some countries will have their difficulties with them.

Schneider:
Like for example Germany.

Birol:
They are still reluctant to put them into effect. But I think we give them the clear message to do it. All these are examples on how we are ringing the alarm bells, and we are ringing them loudly. I can tell you that I am very pleased to see many ministers moving into the right direction now – but it is not enough. Especially if you set the new measures in perspective to the dimension of the problems we are facing.

Schneider:
But isn’t it time to give a clear signal? Especially since a lot of money is wrongly invested by the OECD countries – for example for building new airports, even though there will not be enough oil to constantly increase air travel?

Birol:
We do not only tell that to our member countries, but also to Peking or New Delhi. We explained to our Chinese and Indian colleagues how higher energy efficiency can help them, how public transport can change their life and where infrastructure investments should be put. But in the end it is up to the governments, how seriously they take our statements and warnings.

Schneider:
In the face of the looming supply crisis, wouldn’t it be the right time now to call in a government conference on energy issues?

Birol:
We are discussing and checking the situation regularly. The next important step will be the WEO 2008. In 2009 we will invite to a ministerial meeting and and I expect the energy security to be among the most important issues alongside climate change. But again: It is up to the governments to take actions now. We have warned them.

Schneider:
So far we only talked about oil because it has the largest share in the global energy mix. The Energy Watch Group states that we cannot just double the amount of coal or uranium once oil starts to run out. Aside from climate issues, those energy sources are not unlimited either. What does the IEA say about this?

Birol:
There is a difference between coal and uranium. Coal is a global resource, it can be found almost anywhere and we have large amounts. But the problem is – if we leave the climate change out of this for a moment – that it is becoming more and more difficult to transport the coal from the mines to the consumption centres. After having talked about oil prices already, let me tell you that the price for coal has more than doubled since the beginning of 2006. The coal prices, too, are rising because China has become an important importer while we don’t see a major increase in production anywhere.

Schneider:
How do you judge the situation for uranium? Today only 60 % of the supply comes from the mines, the rest comes from storage reserves which will be used up soon.

Birol:
For the uranium reserves we see no problem for the time after 2015 to 2020, as long as there are exploration efforts in key regions like Kazakhstan, Australia, South Africa and elsewhere. I don’t think the uranium supply is the main problem for the nuclear economy, it is more a question of public acceptance.

Schneider:
In the light of the shortage and problems with oil, coal and gas, the OECD, the IEA and the United Nations have called for the building of more nuclear power stations to fight climate change. However, we would need three to four times as many nuclear power plants to be able to contribute enough power to make a difference.

Birol:
To limit global warming to two degrees (Celsius I suspect, note from translator) we have to change our system of energy production. There are four ways to do that in a climate neutral way: Energy efficiency, renewable energies, CO2 deposition and nuclear energy. If you split the necessary CO2 reduction to those techniques evenly, we would have to build 30 new nuclear power plants worldwide every year. That is almost impossible. We are currently building 1.5 new nuclear power plants a year.

Schneider:
So a renaissance of nuclear energy is out of the question as well?

Birol:
Nuclear power should at least keep its current 15 % share of the energy mix. When people from my own country ask me, if they should build a nuclear power plant, I tell them about the advantages and disadvantages. But I also tell them that a nuclear reactor should not be built against the will of the people who have to live in its environment. It might be good for the global economy, good for energy security and good for climate protection, but when the local people have a problem with it, we should definitely consider that in the planning.

Comments are now closed on this site, please visit Rob Hopkins' blog at Transition Network to read new posts and take part in discussions.

6 Comments

Shaun Chamberlin
12 Jun 11:02am

This could probably do with reformatting! For anyone else having trouble the full text is here: http://tinyurl.com/4cc57c

Rob
12 Jun 11:17am

Hi Shaun
Thanks for pointing that out… I have a new version of Word Press which is doing some odd things to the formatting, hopefully it is fixed now… thanks for pointing that out.

Peter Driscoll
15 Jun 2:25am

Rob,

Thanks for posting this interview transcript. A very frank and meaningful discussion as you suggest. Possibly the best assessment of energy futures I have read to date.

The formatting is now fine by the way. One small thing – in your intro you refer to the WEO as the world economic outlook. Birol refers to it as the World Energy Outlook.

I was particularly interested also in Birol’s identification of three issues – Energy Security, Climate Change and the Energy/Poverty relationship. As the developing countries are hardest hit (and we are already seeing this) how will the developed world respond? Shall we stand by and watch millions of people starve to death? Will we, indeed will we even be capable of taking in masses of refugees from energy-food-famine ravaged countries? Permaculture has already saved or improved hundreds of thousands of lives in developing countries. It seems to me that massive upscaling of Permaculture education and projects in the third world is going to be needed – already is in fact.
Peter

PL Lemercier
15 Jun 3:56pm

Very interesting.

But we are here in South Africa very far from reasoning like this about transitional culture and rationing. May be the influence of USA ?

For interest sake, what would be the percentage of people in UK thinking about greenhouse gases and reducing their general consumption and wastage ?

Regards

PL Lemercier
Renewable Energy Centre
Port Elizabeth
South Africa

Jerry
16 Jun 1:37am

“The MIT report calculated the world’s total EGS resources to be over 13,000 ZJ. Of these, over 200 ZJ would be extractable, with the potential to increase this to over 2,000 ZJ with technology improvements – sufficient to provide all the world’s energy needs for several millennia.”

http://geothermal.inel.gov/publications/future_of_geothermal_energy.pdf

http://en.wikipedia.org/wiki/Geothermal_power

[…] Fatih Birol Offers the World an Oil Health Check, and the prognosis isn’t good. […]