The optimism typically found in the International Energy Agency's annual World Energy Outlook report is strangely missing this year. Instead, the IEA is taking a far more sober perspective on the world's oil-consuming future due to our ever-greater reliance on costly unconventional oil sources.
Output from currently producing fields is projected to fall precipitously, looking ironically like the steeply declining trajectory of peak oil's Hubbert curve. (I say ironically because the IEA has historically denied the existence of peak oil.) According to the report, by 2035 three-quarters of currently operating oil fields won't be producing anymore. In fact, current fields are only expected to account for less than one-fifth of that year's production.
That leaves over 80 per cent of the IEA's 2035 production projection coming from new oil fields, ones that either haven't yet been developed or haven't even been discovered. And the contribution from that undiscovered category alone is still far greater than the one from currently producing fields. That's a tall order for new field discovery.
Undeveloped or undiscovered oil fields, growth in oil sands production and increased reliance on natural-gas liquids account for all the expected growth in world oil production over the next two and a half decades. Curiously absent from this list is any contribution from conventional oil production-you know, the type you can afford to burn in your car, the type the global economy can afford to use to power transoceanic trade? According to IEA projections, it now appears that the production of conventional oil peaked-dare I say it?-back in 2006.
Of course that doesn't mean the world is literally running out of oil, as the World Energy Outlook emphasizes with its forecast of ever-greater reliance on unconventional oil resources. But for these resources to become legitimate reserves, they have to be accessed at prices consumers can afford to pay. Yet even the IEA acknowledges that oil prices as high as $200 per barrel will be needed to make these resources economically viable in the future.
And therein lies the greatest weakness of their projections. The agency's forecast rightly projects that oil prices will soon rise to triple-digit range-albeit nowhere near the pace that would be required to drive their supply forecast for robust growth in the use of unconventional oil. But nowhere is there any appreciation for what that would mean for world economic growth.
The global economy experienced its most severe post-war recession after its brief initial encounter with the very same prices that are now being forecast for our oil-consuming future. And that recession occurred despite the mitigation of record fiscal stimulus and bailouts that have left countries like Ireland bankrupt and may potentially threaten the solvency of creditor countries like the UK.
So what are the chances our economy will ever be able to afford to burn the oil that the IEA's supply forecast says we'll find?