Roy Family Fellow, Geopolitics of Energy Project, Belfer Center for Science and International Affairs
Although quite late, the International Energy Agency (IEA) has noticed that American crude oil production is increasing at an unprecedented rate, and that it will continue to do so. In a report published only one year ago, the Agency had largely underestimated the phenomenon, as had many others.
In its new World Energy Outlook 2012, the IEA now expects that the US will produce 11.1 million barrels per day (bpd) of petroleum and natural gas liquids (NGLs) by 2020, compared to little more than 8 million bpd in 2011. In a study published by the Harvard Kennedy School in June (Oil, the Next Revolution), I had hypothesized even higher American production, 11.6 million bpd by 2020. This did not include biofuels, which by that year could raise overall American liquids production to more than 13 million bpd. The additional studies that I am carrying out on more than 2,500 tight oil and shale oil wells in the United States lead me to believe that American production could be even higher by 2020 .Other observers have forecast similar growth rates during the same period or sooner (including Citibank).
But the IEA numbers suffer from more than tardiness.
First, they hypothesize that the United States will be the top oil producer in the world in 2020, ahead of Saudi Arabia. Be careful. For some reason, the experts at the Agency in Paris have lowered the effective production of Saudi Arabia in 2020, bringing it below that of the United States, without pointing out in their press releases that the Saudis maintain an unused capacity of – according to the IEA – 1.5-2 million bpd. In other words, Saudi production capacity would still be higher than that of the United States, but probably the Saudis will not exploit it fully, in order to support oil prices (as they have done throughout their history). It may be more honest to explain things more fully, but it is quicker for the IEA simply to say that the United States will produce more than Saudi Arabia.
Another defect of the IEA numbers is that they do not seem to take into account the oil boom going on outside of North America.
Only less than two months ago, the Agency recognized that Iraqi production could exceed six million bpd by 2020 (I believe that the number will be much higher). For that matter, except for Canada, the Agency seems too cautious in estimating the impact of sizable investments and extensive new production technologies throughout the world.
So far, most of these technologies have been extensively used only in the U.S, Canada, and the North Sea. And the bulk of oil & gas exploration in the world has been conducted in these areas too. Now, thanks to the high price of oil, advanced technologies are applied to other countries as well, and they will significantly change the rate of decline of working oilfields, reviving their production. Like many other agencies and experts, the IEA calculates decline rates based on historic rates, so it understates their future potential as reshaped by new technologies.
As earlier, the potential of some countries appears seriously underestimated, beginning with production in Russia, which for more than 10 years has continued to grow, notwithstanding all those who have so often announced its decline (the IEA included).
Like most energy agencies and think-tanks, in the last 20 years the IEA has shown neither a good record of sound predictions nor a reliable capability of rising a “red flag” on potential new phenomena. It was unable to foresee the dramatic fall of oil prices that took place at the end of 1990s, as well as the unprecedented oil price escalation that occurred after 2003. It didn’t anticipate either the dramatic fall of oil demand after the 2008 global financial crisis or its sluggish recovery after that. It missed the timing of the shale gas revolution in the U.S., and now has been late in signaling the U.S. shale oil boom.
It matters that our global energy agency lacks the ability to chart these underlying trends effectively. After all, the agency has been the number one source of primary data on energy for the entire world since it was created in the 1970s by the OECD countries. This means that governments, companies, banks and industry experts depend on the IEA information and analysis to make choices with huge implications for societies and economies.
The truth is that we are entering a era of oil abundance, which in and of itself is not necessarily a good thing, considering the environmental and climate effects of intensive use of oil.
For this reason, even though oil is not about to become scarce, we need to focus as urgently as ever on energy efficiency policies that will put a cap on consumption. Indeed, a season of oil abundance could lead to a significant drop in prices, which in turn could cause worldwide oil consumption to bounce back. Realistically, this is what we must avoid.
Leonardo Maugeri is Roy Family Fellow in the Geopolitics of Energy Project at Harvard Kennedy School’s Belfer Center for Science and International Affairs. Maugeri was a senior executive at Eni, the largest Italian company. He has written four books on energy, including Beyond the Age of Oil: The Myths and Realities of Fossil Fuels and Their Alternatives, published in 2010.