The Future of Oil - 2010 to 2035

Now that we've seen West Texas Intermediate prices flirting with the $100 a barrel mark yet again and OPEC maintaining its production level at 30 million BOPD, I thought that it was time to take a look at the latest World Energy Outlook (2011) from the International Energy Agency (IEA) and see what they predict for the world's energy markets, focussing on oil, for the next 25 years.

First, let's look at the 3 year chart for West Texas Intermediate noting the steady rise in price from the lows of late 2008:

Now, let's look at the 3 year chart for Brent once again noting the dramatic rise in price from the lows of late 2008:

The IEA opens by noting that energy demand is expected to rise by one-third between 2010 and 2035 due to population growth which is estimated at 1.7 billion people and average annual economic growth which is estimated at what appears to be a rather robust 3.5 percent.  While slowing recent economic activity may have an impact on energy consumption over the coming years, over the 25 year period, it makes only a marginal impact on consumption growth.  Here is a graph showing the increase in demand for various forms of energy over the next 25 years (in blue):

Notice that both natural gas and renewable forms of energy fulfill the largest portion of the increased demand for energy.  The impact of renewables results in an overall drop in demand for fossil fuels  from 81 percent of all energy used in 2010 to 75 percent in 2035.

Population and economic growth is uneven throughout the world with non-OECD nations comprising 90 percent of growth and 70 percent of growth in economic output.  As a result, in the next 25 years, non-OECD nations account for 90 percent of the increase in energy demand.  Two nations, China and India , account for 50 percent of the growth in energy demand as shown on this graph:

By 2035, China consolidates its position as the world's largest energy consumer, consuming 70 percent more energy than the United States despite the fact that its per capita consumption is less than half the level of the United States.  Growth in energy demand for India is even faster than that of China as more and more of its rural citizens strive to reach the middle class and expect to share in the benefits.

Now, let's focus on oil.  By 2020, China is projected to take over first place from the United States as the world's largest oil importer and by 2035, it is anticipated that China will import over 12 million BOPD.  By 2035, 80 percent of the oil consumed in non-OECD Asia is sourced from imports, up from just over 50 percent in 2010.  This is largely due to natural declines in domestic Asian production.   By 2015, even the EU nation states will import more oil than the United States, largely because of rising U.S. oil output from tight formations (think fracking) and improved efficiency.  Here is a graph showing the changes in oil imports for the next 25 years:

World oil demand is projected to rise from 89 million BOPD in 2010 to 99 million BOPD in 2035 despite improvements in fuel economy technology.  While alternative fuels (i.e. electricity) are starting to appear in the transportation sector, it could take decades before new technology significantly impacts the use of oil as a transportation fuel.  Here is an interesting graph showing the projected changes in the vehicle purchases by nation over the next 25 years: 

The world's total vehicle fleet is projected to double in size to 1.7 billion vehicles in 2035 with most new cars sold in non-OECD nations by 2020.  Notice the increased market penetration of vehicles in both China and India.  As a result, non-OECD nations will become increasingly important to the oil demand scenario.

On the supply side of the oil ledger, conventional crude production is expected to remain constant before declining slightly to 68 million BOPD by 2035.  Most oil will be sourced from the Middle East and North Africa (MENA), with the area accounting for over 90 percent of the required growth in output needed to maintain supply - demand balance.   The IEA estimates that, to develop the productive capacity of the MENA region, an annual investment of $100 billion will be required.   To compensate for production declines over the next 25 years, 47 million BOPD of gross production additions are needed; to put this into context, this is twice the volume of oil currently produced by all Middle East OPEC nations!  This will require an investment of $10 trillion over the next 25 years.  As a firm believer in Peak Oil, I would suggest that this reserve and production replacement scenario is highly improbable.  With my background as a geoscientist in the oil industry, I find this graph from BP's Statistical Review of World Energy most compelling:

Note the non-descript grey line in the middle of the graph.  That's the world's reserves-to-production (R/P) ratio.  Note that since 1985, the R/P ratio has not increased despite the trillions of dollars spent on oil exploration and exploitation and the new technologies that have allowed production from ultra-deep water and ultra-tight formations.  The world is on an oil treadmill with resource discovery staying just level with oil consumption.  If not for the one-off reserve additions in Latin America, the situation would be far worse.  As I stated above, the odds of adding an additional 47 million BOPD of new production to compensate for natural declines are rather low.

The IEA suggests that part of the increase in oil production required could be sourced from natural gas liquids (18 million BOPD by 2035) and 10 million BOPD from unconventional sources.  As shown in this graph, the largest oil production increases are sourced from Iraq, Saudi Arabia, Brazil, Kazakhstan and Canada:

Additionally, 4 million BOPD of biofuels are required to balance the ledger, a scenario that will require massive subsidies by governments who will, at that point in time, already be handicapped by unserviceable levels of sovereign debt making that part of the scenario less likely to occur.

As I have noted in previous postings, it is demand from the non-OECD Asian nations that will drive the energy markets in the coming decades, particularly the world's oil market.  According to the United Nations, 1.3 billion people in the world do not have electricity and 2.7 billion people still rely on biomass for cooking.  As these people strive to reach the middle class over the coming years, their energy consumption will, quite naturally, rise in lockstep with their improved lives.  This increasing demand will occur at the same time as the world's conventional sources of oil dwindle.  My suspicion is that the looming scarcity of the one resource that led to the rapid industrialization of the world in the first half of the 20th century will also lead to the world's next major geo-political conflict, particularly as prices for fossil fuels rise to the point where we are all very uncomfortable.