LONDON: A potential shortfall in investment in production in the Middle East could create a $15 spike in the oil price by 2025, the energy arm of the Organisation for Economic Cooperation and Development (OECD) said.
The world will need to invest $40 trillion in energy supply and $8 trillion on energy efficiency by 2035 to meet growing demand and falling output from mature sources of energy, the International Energy Agency (IEA) said in a report.
A large proportion of this will need to come from the Middle East, as a rise in non-Opec production such as US shale oil starts to lose steam in the mid 2020s. But the IEA was wary on prospects for a large enough increase in investment from the region.
“The prospects for a timely increase in oil investment in the Middle East are uncertain: there are competing government priorities for spending, as well as political, security and logistical hurdles that could constrain production,” the report said.
If production does not increase as needed, it will raise oil prices, the report said. “If investment fails to pick up in time, the resulting shortfall in supply would create tighter and more volatile oil markets, with prices that are $15 per barrel higher on average in 2025.”
The IEA said investment in energy production was over $1.6 trillion in 2013, more than double in real terms than 2000, and that $130bn was spent to improve energy efficiency.
Investment in renewable sources of energy rose to a peak of $300bn in 2011 from $60bn in 2000, but has since fallen to $250bn for 2013.
More than four times this, $1.1 trillion per year was spent on the extraction and transport of fossil fuels, oil refining and the construction of fossil fuel-fired power stations, the report said.
Of the $40 trillion that will need to be spent by 2035, less than half will be spent on meeting growth in demand. “The larger share is required to offset declining production from existing oil and gas fields and to replace power plants and other assets that reach the end of their productive life,” the report said.
Of the total investment in upstream oil and gas spending of more than $850bn per year by 2035, gas will account for most of the increase. Over $700bn is expected to be invested in the liquefied natural gas (LNG) sector alone during this period.
The IEA warned that more gas might not lead to much lower prices. “The expectation that a surge in new LNG supplies will totally transform gas markets needs to be tempered by recognition of the high capital cost of LNG infrastructure, with transportation typically accounting for at least half of the cost of gas delivered over long distances,” the report said.
For Europe’s power markets, the IEA warned that a shortfall of investment could threaten reliability of electricity supplies.
“The investment required to maintain the reliability of Europe’s electricity system is unlikely to materialise with the current design of power markets,” the report said, adding that wholesale prices were around 20 percent too low to make investment attractive.
“Europe requires more than $2 trillion in power sector investment to 2035... If this situation persists, the reliability of European electricity supply will be put at risk,” the IEA said.
Spending on renewable sources of energy and energy efficiency will not be enough to meet targets on climate change stabilisation goals, the report said.
“Today’s policies and market signals are not strong enough to switch investment to low-carbon sources and energy efficiency at the necessary scale and speed,” the report said.
Meanwhile, brent crude oil futures slipped towards $108 a barrel yesterday, reflecting weak European refining demand, but reasonable Chinese manufacturing data helped keep a floor under prices.
Brent futures for July were down 36 cents at $108.47 a barrel by 1351 GMT. US crude was down 12 cents at $102.35 a barrel.
“I think technically Brent has broken to the downside and that it will trend lower gradually,” said Christopher Bellew, an oil broker at Jefferies Bache in London. “However, the market is pretty well-balanced fundamentally and geopolitical risk is still with us, so I do not envisage prices going below $105.”