IEA sees oil prices rising sharply by 2020, Birol says
07 Mar 2017 - 11:49
HOUSTON, United States: The International Energy Agency (IEA) foresees crude oil prices rising sharply by 2020 due to falling investment in new oil projects, its Executive Director Fatih Birol said Monday.
"We see significant risk of prices rising sharply starting from 2020, unless a significant number of projects are sanctioned soon," Birol told the IHS CERAWeek 2017 energy conference held in Houston, Texas.
"In 2016, there was $450 billion investment in oil investment. This is 25 percent below the previous year. Investment must increase at least 20 percent every year to compensate for demand growth," said Birol, a Turkish economist and energy expert who has headed the IEA since 2015.
Due to low oil prices since mid-2014, oil producers post major losses every quarter. This makes it difficult for them to find capital to make new investments, thus raising the risk of a shortage in global supply in the near future.
"Signals we get from oil companies [both national and private] are not very encouraging. There has been two years of substantial decline in investments," Birol said.
Birol said their main worry is the decline in upstream investments. "In 2017, if we don't see a substantial increase, the market tightens after 2020. Spare production capacity shrinks to historically low levels."
He noted that spare production capacity was 4 percent in 2008, but it is now lower than 2 percent.
"We need investments in oil-producing countries if we don't want to see tightening," Birol said, and added, "World crude stocks are in decline. With OPEC’s plan, stocks will continue to withdraw."
-Production increases not enough
OPEC and Russia began freezing their output levels in January, in order to increase crude prices. International benchmark Brent crude rose to $58 a barrel recently, after hitting below $30 a barrel in January 2016.
Based on the IEA's projection on a $58 per barrel Brent price, Birol said they see oil production increases from the U.S.
"The U.S. can respond to higher prices faster than others ... We are witnessing the start of a second wave of U.S. shale oil growth," he said.
The IEA sees the U.S. as "the number one source of supply growth" by adding 1.6 million barrels per day (mbpd) of production by 2022, according to the agency's Oil 2017 Report released Monday.
"If Brent hits $80 a barrel, this expansion will reach 3 mbpd by 2022," Birol said.
But the production rise from the U.S., followed by Brazil and Canada substantially, will not be enough to overcome the risk of supply shortages due to declining investments, Birol said, since the IEA sees demand rising from China and India strongly.