When the oil price soared to over $99 per barrel earlier this year, the cause was not surging demand, nor speculation, nor even impending peak oil, but a forecasting error by the International Energy Agency. That’s according to a presentation by veteran analyst Henry Groppe, one of the most original thinkers in the oil patch, at an investment conference organized by 13D Research in New York last week.
In an interview with lastoilshock.com, Mr Groppe went on to argue that Saudi Arabia can maintain current production for up to two decades, global peak oil will come in 2008, but that prices will nevertheless remain between $65 and $85 per barrel until around 2015.
The IEA was inadvertently responsible for record oil prices this autumn because of its bullish forecast – issued in September 2006 – that non-OPEC oil supply would grow by 1.8 million barrels per day the following year. According to Groppe, it was this that prompted the cartel to forestall an expected glut by cutting quotas by 1.7 mb/d in late 2006. However the IEA forecast proved wildly over-optimistic and the Agency now says non-OPEC output is likely to grow by just 500 thousand barrels per day. So when seasonal demand picked up this autumn “there wasn’t enough oil” and prices soared.
The IEA has a history of over-estimating non-OPEC supply, but this time the predicted increase was the largest since 1984, a time when massive over-supply forced Saudi Arabia to slash output from 10 mb/d to 2.25 mb/d. This, says Groppe, “got the Saudis’ attention”.
Groppe’s analysis challenges the growing belief that Saudi Arabian production cuts in recent years have been driven by geological constraints. The Houston-based consultant is convinced that the kingdom can maintain 8-9.5 mb/d for as long as two decades, and that it will also build a cushion of spare capacity. However he also believes global oil production will peak in 2008 because of steep declines elsewhere.
But in another challenge to conventional wisdom, Groppe insists that global peak oil is consistent with an oil price of $65-$85 until around the middle of the next decade – barring geopolitical spasms. That’s because around 15 mb/d of oil consumption in the developing world is still used for electricity generation and other non-transport purposes for which there are much cheaper alternatives such as coal. The substitution of such fuel oil is already under way, particularly in China, and will allow oil consumption in the transport sector to keep rising despite the cap on overall production. It was the elimination of this kind of oil use in the US and Europe that led global oil consumption to drop by 8 mb/d between 1980 and 1985.
Groppe is a Houston-based contemporary of M. King Hubbert who founded the consultancy Groppe, Long, Littell over 50 years ago, and who claims to have forecast every major discontinuity in the oil market since then. If he is right about the role of the IEA in the recent price spike, it would be ironic that the OECD’s energy watchdog, which routinely calls on OPEC to pump harder, should have scared the cartel into producing less. It would also be ironic that OPEC had been misled by the IEA, since Groppe’s analysis has also exposed how OPEC’s official production numbers are often falsely inflated by as much as 2 mb/d.
In a separate development, the IEA recently confirmed that it is reviewing its reliance on oil resource forecasts from the United States Geological Survey that are widely regarded as wildly over-optimistic.