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Oil-tanker traffic has increased in Burrard Inlet. (John Lehmann/The Globe and Mail)
Oil-tanker traffic has increased in Burrard Inlet. (John Lehmann/The Globe and Mail)

Bet on oil doesn’t look so sound any more Add to ...

The International Energy Agency has a utopian view of the near-future, but one that must be troubling to energy investors: According to the IEA’s latest World Energy Outlook, the U.S. is set to become energy independent due to rising domestic production, while energy efficiency improvements could cut global demand growth in half.

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For sure, a lot of these improvements are years away. And although the IEA is a respected forecaster, any long-term forecast must be taken with some degree of skepticism. Still, the report should raise the question of whether Canadian oil producers are sound long-term investments.

So far on Monday, the IEA report appears to have had little impact on markets. Crude oil was down just 27 cents (U.S.) a barrel in afternoon trading, to $85.80. And Canadian energy stocks within the S&P/TSX composite index were down just 0.1 per cent.

This could be because markets tend to be more concerned about events six months down the road, rather than 20 years. But nonetheless, the long-long term predictions of the IEA conflict with two key understandings among bullish energy investors: The world is running out of oil, and demand is insatiable.

The IEA’s predictions appear to challenge both assumptions:

  • “The U.S., which currently imports around 20 per cent of its total energy needs, becomes all but self-sufficient in net terms” by 2030.
  • “Greater efforts on energy efficiency would cut the growth in global energy demand by half.”
  • “Global oil demand would peak before 2020 and be almost 13 mb/d lower by 2035, a reduction equal to the current production of Russia and Norway combined.”
  • “The accrued resources would facilitate a gradual reorientation of the global economy, boosting cumulative economic output to 2035 by $18-trillion, with the biggest gains in India, China, the United States and Europe.”

Of course, these predictions are not necessarily a disaster for Canadian energy companies, given that Asia is expected to pick up the slack in global energy exports even as the United States shuts the door.

As well, Ryan Avent at Free Exchange makes the point that increasing energy efficiency in the United States could be harder to achieve in an era where the country has achieved energy independence.

“Rising American energy supply may come as a relief to many,” he said in a blog post. “But the elimination of ‘dependence on foreign oil’ as an economic and security bogeyman may lead the world’s largest economy to abdicate responsibility for global leadership on climate change even more than it already has.”

But Leonardo Maugeri, Roy Family fellow at the Harvard Kennedy School and a former executive at the Italian energy company Eni, recently outlined a near-term future that resembles the IEA’s longer-term outlook – adding that the price of oil today seems to be set by fear rather than supply and demand.

In an op-ed piece in the Wall Street Journal (“The Coming Oil Glut,” also available here), Mr. Maugeri predicted that oil production at the end of this year will probably rise above 92 million barrels a day, while sluggish oil demand growth will see global demand at about 89 million barrels a day.

So what is keeping the price of oil above $85 a barrel? Mr. Maugeri points to concerns about conflict in Iran but also what he sees as a “distorted perception of the current and future availability of oil.” As he explains: “Perhaps fearing that we will soon reach ‘peak oil,’ most analysts seem convinced that oil will remain in tight supply in the future, and that new supplies will be too expensive to allow for a decline of oil prices.”

If this fear subsides, you have to wonder where the price of oil will land – and what impact it will have on Canadian producers. Energy producers once looked like a sure bet on rising global energy demand and scarce resources. With both assumptions now challenged by the IEA, the sure bet doesn’t look so sure anymore.

 

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