If the International Energy Agency is correct, then a global economic slowdown might be the only thing the world can hope for to help avoid a supply/price crunch and the continued rise in world oil prices.
In what could only be described as a gloomy outlook, the Paris-based IEA has peered into the next five years and doesn't like what it sees.
Basically its more of the same. The tightening supply/consumption situation of the past four years months, will only worsen between now and 2012.
The post 2010 period will see the tightness accentuated.
The only way the pressure could be relieved is for the world economy to slow sharply over the next two to three years, with China suffering a sharp slump as well.
That would hurt the resources boom and cause higher unemployment but from what the IEA forecasts, something that drastic would be required to avoid a further rise in oil prices above current levels.
But according to the IEA there's no chance of a slowdown. The update of the original forecast last February is based on an annual global growth rate of a solid 4.5 per cent, a touch slower than the 5 per cent plus at the moment, but not much.
The IEA says the oil market will tighten over the next five years because of a combination of rising consumption (India, China and other developing countries) and production falls in mature areas, such as the North Sea, while long delays in new production projects will add to the upward pressures.
The IEA's warning came as London oil prices went back over $US76 a barrel, to be around $US2.50 a barrel below last summer's all-time high of $US78.65.Prices in New York were a little easier due to technical reasons.
The IEA said in its Medium Term Oil Market Repot that "oil looks extremely tight in five years time" and there are "prospects of even tighter natural gas markets at the turn of the decade".
The IEA says demand will grow at an annual rate of 1.9 per cent in the five years to 2012 to reach 95.8m barrels a day.
The Agency says non-Organisation of the Petroleum Exporting Countries will lift output by around at 1 per cent, about half the rate of demand growth projections, to 52.6 million b/d by 2012.
The cumulative growth in non-OPEC production over the next five years would add 2.6m b/d of new net production capacity, down from the 4.6m b/d added from 2000-07.
That means OPEC will have to pick up the slack, if it wants to, or it can restrict output and maintain prices in real terms.
The oil cartel controls some 40 per cent of global oil output at the moment and for the world to escape really expensive oil, the organisation will have to increase by around 16 per cent between now and 2012.
The IEA estimates OPEC would have to supply about 36.2m b/d by 2012, compared to today's 31.3m b/d.
That would in turn cut OPEC's unused capacity to 1.6 per cent of global demand, down from 2.0 per cent in 2007.
The forecast assumes no net expansion of capacity from Iran, Iraq and Venezuela and that the 500,000 bpd of Nigerian production that has been shut for a year, will not reopen during the next five years.
"Despite four years of high oil prices, this report sees increasing market tightness beyond 2010, with OPEC's spare capacity declining to minimal levels by 2012," the IEA said.
The IEA said falling production in mature areas such as the North Sea and long delays in new production projects in other areas will result in a slow fall in non-OPEC's share of world oil output.
UK production is expected to fall from today's 1.7m b/d to just 1m b/d in 2012 and that of the other major North sea producer, Norway, will fall to 2m b/d in 2012 from 2.5m b/d this year.
Biofuels would contribute to ease the supply crunch, although would still represent a small percentage of global supply. The IEA forecasts global biofuels output to double in five years to reach 1.75m b/d in 2012, or just 2 per cent of global oil supply.
The IEA said it sees 50 pct supply growth in automotive biofuels between 2007 and 2009.
It also sees improvements in refining capacity, which is expected to increase by 10.6 mln b/d through to 2012, but it warned that higher product output could lead to lower refining margins or profits.
This could in turn lead to a delay in new refining projects, which would soon push refined product prices back up.
'If refining margins dip … further (project) slippage is possible. As such, market dynamics suggest that it is unlikely that the refining industry will return to a long-term era of low refinery margins,'the IEA said.
But it criticised international and national oil companies for not investing enough to compensate for those declines in oil output.
"Substantially higher cash returns to shareholders stand in curious contrast to growing upstream supply tightness and essentially unchanged exploration and production effort," the report said.
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The IEA sees global oil product demand growing by 2.2 pct on average between 2007 and 2012, driven by stronger oil demand growth in non-OECD countries, especially Asia and the Middle East.
The forecast assumes a global economic growth rate of 4.5 pct a year for the five years, implies oil product demand will climb to 95.8 mln b/d by 2012 from 86.1 mln b/d in 2007.
For natural gas, the IEA said that not only does it see a tight market by the end of the decade it also believes the market will struggle to draw on fuel oil supplies as a substitute.
'Ultimately this may lead to upward pressure on fuel oil and gas prices … fostering competition for supplies across the hydrocarbon sector,' said the agency.
The IEA said China's oil demand this year is expected to remain flat compared to its previous forecast at 7.59 mln barrels per day
