International Politics
IEA's World Energy Outlook 2006 has significant methodology flaws
IEA and the Middle East: Perception vs. reality. IEA released its flagship publication, World Energy Outlook 2006 (WEO 2006), last month. Its projections of the call on OPEC are unrealistic. Its estimates of Middle Eastern oil production are based more on perceptions than hard facts. The methodology is questionable. Data and figures, especially reserves data that were adopted from an industry publication (not this one), are outdated – published about a year ago. The choice of adopting certain reserve figures without reporting reserves figures estimated by other groups raises a number of political and technical questions. The WEO problem. Experts have criticized supply predictions of IEA and the US EIA for years. In fact, this issue was the focus of several of my columns in this magazine in the past:
The Gulf States cannot increase production 60% by 2030, as projected in WEO ’s reference case, or by about 80%, as projected by other scenarios in previous years. Several technical, economic, financial and political reasons prevent these countries from meeting WEO 2006 projections. IEA recently acknowledged that Gulf countries might not produce as much as projected in WEO. Consequently, IEA dedicated a whole section in WEO to a scenario in which OPEC members defer investment in production capacity. While this scenario is a good step forward, IEA failed to address the main problems: its method of projection and its perceptions of the Middle East. Even IEA’s new scenario still uses an oligopoly model, in which it projects the call on OPEC. Sadly enough, WOE does not even call it by its true name. It calls it OPEC production instead of the call on OPEC. WEO uses behavioral variables to estimate world demand and non-OPEC production. OPEC output, even under the deferred investment scenario, is not based on behavioral variables. WEO assumes: OPEC Production = World Demand – Non-OPEC Production In the deferred-investment scenario, IEA adjusted OPEC production downward. The only way to keep the equality above is to lower the growth of world oil demand and increase non-OPEC output. How? Lower economic growth. Why? Assume that higher prices will lower economic growth. Higher oil prices also increase non-OPEC production. What is striking is that this assumption might violate the WEO assumption that non-OPEC output will peak around 2015. WEO adds various perceptions and unsupported claims to the mix. It claims, without providing any evidence, that resource nationalism and the inability of international oil companies (IOCs) to access oil reserves in the oil producing countries would hinder investment, and therefore lower oil production. Yet, analysis of the impact of consuming countries’ environmental regulations on IOCs’ investment in additional production capacity has not received proper attention. WEO ignores the fact that resource nationalization might maintain the flow of oil and even increase production in the long run. Several oil producing countries might end up in total chaos, if their governments do not ensure that the needs of the poor are met. Lack of institutional framework makes these countries unable to impose the proper tax system on IOCs. Poverty and increasing income gap, combined with revolutionary rhetoric, make these governments nationalize oil assets, re-negotiate old contracts and increase taxes. Those who argue that nationalization moves are ideological should remember that moves toward free markets are also ideological. The above claims in WEO have serious political implications. Concentration of reserves means concentration of power in the hands of a few producing countries. If industrial countries suffer from high oil prices, it is not because of an ever-increasing thirst for crude. Rather, it is because of Middle Eastern countries’ “unwillingness” to invest in additional capacity. Ironically, IEA has spent much time in the last two years explaining to the world how increased oil prices have not affected economic growth. Why has there been a limited impact on economic growth, while IEA is certain that higher oil prices will reduce economic growth in the future? WEO does not provide any answers. Highlights. Several WEO contentions should be highlighted in more detail. For instance, IEA’s reference case projects that world oil demand will increase from 84 million bpd in 2005 to 99 million bpd in 2015 and 116 million bpd in 2030. Most of the increase, 63%, will be for transportation. Most of the oil consumption gain will be in the developing countries. Interestingly, the fastest oil demand growth will be in the Middle East. IEA attributes the increase to greater income from higher oil revenues, which boosts subsides of fuel, and therefore increases demand. WEO also expects OPEC output of crude and NGLs, and non-conventional crude, to increase from 34 million bpd in 2005 to 42 million bpd in 2015 and 56 million bpd in 2030. OPEC market share will increase from the 40% to 48% by 2030. Non-OPEC production should increase more slowly. Furthermore, WEO expects Saudi production of crude and NGLs to increase from 10.9 million bpd in 2005 to 13.7 million bpd in 2015, and 17.6 million bpd in 2030. IEA projects output increases for Iran, Iraq, Kuwait and the UAE. It forecasts that Qatar’s production will decline. Additionally, non-OPEC output may peak around 2015. Finally, WEO projects an increase in world oil trade. The Middle East will see the biggest increase in net exports, from 20 million bpd in 2005 to 35 million bpd in 2030.
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