Fatih Birol, the IEA’s chief economist and a key figure behind their recent World Energy Outlook. (image: evworld.com)

Last week, Fatih Birol, chief economist for the International Energy Agency, answered questions submitted to the Financial Times by curious readers. Many of the questions concerned the IEA’s most recent World Energy Outlook, which, among other things, outlined a global energy policy meant to stave off catastrophic climate change.

In his answers Birol described the details of the IEA’s “450 scenario,” the possibility of peak oil, and the rise of natural gas. Above all, Birol seemed interested in separating fact from fancy, and many of his responses—though only a paragraph in length—serve as clear and concise summaries of the IEA’s recent statistical findings and political recommendations.

For instance, Birol acknowledged that while economic theory suggests that “a global carbon market would be the most effective way to achieve a 450 ppm scenario,” evidence shows that current negotiations are unlikely to lead to such a system. That is, despite all of the clamoring for a global climate treaty at Copenhagen, we shouldn’t expect an organized collaboration, but rather a hodgepodge of individual contributions that add up over time. With this in mind, Birol and the IEA developed a more realistic analysis of the global energy market by adopting “a framework that assumes different country groups committing to economy-wide emission targets in different moments in time, reflecting their different stages of economic development and their responsibility in cumulative emissions.” While this isn’t the most cost-effective way to go about things, it is (at the moment) the most tenable, and may even lead to fuel-cost savings that will offset some of the added expense.

Not surprisingly, Birol was asked by more than one reader to prognosticate on peak oil. In response, he clarified the IEA’s most recent prediction: if there are no new discoveries of oil, global oil production will peak around 2020, but only if demand grows as sharply as expected. More specifically, the IEA anticipates that non-OPEC oil output will peak within the next several years, if it has not already. Oil generated by OPEC countries—which contain huge, low-cost resources—are expected to fill the gap. However, this means that such countries will have to increase their output substantially, which some of them may be unable or unwilling to do. Birol warned that underinvestment in unconventional and alternative fuels could lead to much higher oil prices, placing a heavy burden on the world economy. Thus, lower oil use would not only “contribute to meeting climate-change goals,” but would “enhance energy security and bring about long-term economic benefits.”

Furthermore, Birol reminded readers that peak oil is not as simple as it may seem. “I think it is important to bear in mind that peak oil is not just about supply; it implies a peak in demand too. Price is the key that will balance both. It is our view that higher prices will be needed to allow supply to rise as we need to exploit more difficult and costly resources; we assume that the average crude oil price reaches $115 per barrel in today’s money by 2030 in our Reference Scenario, and $190 per barrel in nominal terms.”

In response to readers’ queries about the increasing importance of natural gas, Birol suggested that the “glut of natural gas” could persuade importers and exporters alike to adopt a new pricing system. At the moment, gas is traded in long-term contracts, which according to various indexation formulae, link the price of gas to changes in the prices of oil. This is based on the assumption that gas competes directly with oil products, though in recent years gas has become more closely connected with other fuels, like coal and electricity. Thus, the current gas glut provides “a window of opportunity for Europe and Asia to move to a more rational system of market-based pricing.”

IEA director Nobua Tanaka. (image: iea.org)

International Energy Agency executive director Nobuo Tanaka has a lot on his mind, as detailed in a Reuters article published on Tuesday.

At the top of his agenda is the state of the world’s economy. Though expectations of economic recovery and revived oil demand are high, Tanaka said that stocks of distillate fuel—which includes diesel and heating oil—remain high throughout the member countries of the Organization for Economic Cooperation and Development, which is comprised of the globe’s 30 biggest economies. A lack of demand for diesel fuel, Tanaka said, serves as an indicator for industrial production.

Ship brokers ICAP estimate that over 90 million barrels of oil products are currently stored at sea. Another 6.5 million barrels could be added to this total by the end of the year. This, more than anything else, indicates the huge amount of supply currently backlogged.

The large stockpiles of fuel could also make it difficult for OPEC to determine whether to raise or lower oil production at its next meeting scheduled for December. Tanaka said:

“OECD inventories are very high, and OPEC’s concern is the global economic recovery, so if the economies recover in a robust manner, they will have to produce more. If not, just simply adding to the stock levels does not make any sense.”

However, despite weak demand and large supply, the price of crude oil has hovered around the $80 per barrel mark, significantly higher than prices were this time last year. One reason for this, he said, was the weakening of the dollar, the currency used to price oil.

The loss of value in the dollar has become so pronounced that some have called for it to be replaced with a basket of currencies when pricing oil, as discussed in October here on HeatingOil.com. However, Tanaka maintained that “the most reliable and liquid currency is still the greenback. Moving away from the dollar may not necessarily be the final solution.”

Tanaka also said that existing oil fields could soon reach their peak. However, offshore and underground oil reservoirs remain largely untapped (a point seconded by oil analyst Stephen Schork); they could play a more prominent role in supplying the world’s with oil if investors felt they could make a profit by exploring these opportunities.

Tanaka’s remarks come on the heel of the IEA’s latest World Energy Outlook, which was released last week. In this report, the IEA predicted that oil consumption would rise to 105 million barrels per day in 2030, up from 85 million today. Along with this would come a gigantic increase in demand for electricity. Combined, this could add to climate change while disrupting the world’s security.

Tanaka also refuted accusations published last week in the Guardian from a whistleblower who says that the IEA is underplaying the potential of an oil shortage: “That article says we are too complacent. That’s not true. In fact, we have been quite alarmist about the necessity of putting huge investments into potential, new fields.”