Cheap oil a concern for global security

If crude prices don’t bounce back by the end of the decade, an era of cheap oil could consolidate more oil-market power into the hands of a few low-cost producers in the Middle East — raising concerns about energy security for oilimporting nations, the International Energy Agency says.

The IEA’s closely watched World Energy Outlook, an annual report released Tuesday, said the world’s reliance on Middle Eastern oil exports could “eventually escalate to a level last seen in the 1970s,” most profoundly in developing Asian countries like India and China, if oil prices stay low well beyond 2020 and force higher-cost producers out of the market over the next 25 years. The Paris-based group, which consults 29 oil-importing nations, is a

well-respected oil-market forecaster.

“It would be a grave mistake to index our attention to energy security to changes in the oil price,” IEA Executive Director Fatih Birol said in a written statement. “Now is not the time to relax. Quite the opposite: A period of low oil prices is the moment to reinforce our capacity to deal with future energy security threats.”

Plus, the world’s increased dependence on cheap oil could crowd out $800 billion in possible energy efficiency improvements in automobiles and aircraft by 2040, eliminating 15 percent of the efficiencies the IEA otherwise expects to see. In other words, technological advancements and policy prescriptions for renewable resources might not make as big an impact in the market if fossil fuels are cheaper to buy.

But the IEA’s gloomy scenario, describing a world with cheap — and more tempting — oil until 2040, was just one possible oil-market future considered by group.

For its “Low Oil Price Scenario” to come true, the IEA said, global economic growth would have to remain sluggish for years, violent uprisings in the Middle East would have to subside and the Organization of the Petroleum Exporting Countries would have to live with revenues falling by 25 percent in the pursuit of much higher market share. In this lower-price scenario, the IEA predicted crude prices would hover around $50 a barrel for the next five years and gradually increase to $85 a barrel by 2040.

U.S. crude fell 42 cents to $43.87 a barrel on the New York Mercantile Exchange on Monday. It has plunged 8.4 percent since Nov. 3 as fresh worries about global demand weigh on the market. Brent, the international standard, which is affected by roughly the same market forces as U.S. crude, declined 43 cents to $47.19 a barrel on the ICE Futures Europe.

The IEA’s more moderate oil-price forecast predicts oil prices will rise to $80 a barrel by 2020, with further increases as global energy use grows by a third over the next quarter of a century, as demand in India and China continues to surge.

All told, the IEA said, the world’s daily oil demand could grow by 900,000 barrels each year, though the projected climb of global demand to 103.5 million barrels a day in 2040 could be offset if prices rise and governments adopt more policies pushing the use of alternative fuels.

In the United States, Japan and the European Union, demand for crude could fall by a combined 10 million barrels a day over that same time.

But the oil industry will have to spend $630 billion a year just to keep production levels even with output this year. The U.S. shale plays at the center of the nation’s energy production surge could reach their peak output levels by the early 2020s before they start to decline. “The current overhand in supply should give no cause for complacency about oil market security,” the IEA said.

The IEA said India could eventually overtake China as the country with the highest demand for energy, as the direction of the Chinese economy shifts from heavy steel and cement to growth in the services sectors, requiring 85 percent less energy for each unit of future economic growth.

Meanwhile, the 240 million people living in India without access to electricity will drive the largest surge in global energy demand, overtaking China as the world’s largest user of coal and boosting oil demand to 10 million barrels a day – roughly equivalent to China’s daily demand now. The IEA believes India will import 90 percent of its oil by 2014, as its production “falls well behind the growth in demand.”

India’s policymakers and private sector will have to draw $2.8 trillion to meet the nation’s energy needs over the next 25 years.