World will face oil crunch ‘in five years’
By Javier Blas, Commodities Correspondent

Published: July 9 2007 13:25 | Last updated: July 9 2007 13:25

The world is facing an oil supply “crunch” within five years that will force up prices to record levels and increase the west’s dependence on oil cartel Opec, the industrialised countries’ energy watchdog has warned.

In its starkest warning yet on the world’s fuel outlook, the International Energy Agency said “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 said that supply was falling faster than expected in mature areas, such as the North Sea or Mexico, while projects in new provinces such as the Russian Far East, faced long delays. Meanwhile consumption is accelerating on strong economic growth in emerging countries.

The problem is exacerbated by the fact that supply from non-members of the Organisation of the Petroleum Exporting Countries will increase at an annual pace of 1 per cent, or less than half the rate of the demand rise.

The widening gap between rising consumption and lagging non-Opec supply will force Opec to sharply increase its production in the next five years.

Lawrence Eagles, head of the IEA’s oil market division, told the Financial Times: “If we get to the point were there is insufficient supply, the only way to balance the market will be through higher prices and a drop in demand.”

The IEA Medium Term Oil Market Report came as oil is approaching last year’s record high. Brent crude oil on Monday rose 72 cents to a 11-month high of $76.34 a barrel.

Refineries are already paying record high prices as producing countries have cut the discount at which they sell their oil relative to Brent, according to an analysis by the FT. Most of the discounts had been reduced to levels not seen since 2004 and some even to six-years lows.

Oil demand will grow at an annual rate of 2.2 per cent during the next five years, up from a previous estimate of 2 per cent, to reach 95.8m barrels a day in 2012. China, the Middle East and other emerging countries will lead the increase.

Rex Tillerson, the chairman and chief executive of ExxonMobil, said recently that he thought non-Opec oil production was close to levelling off. He told the FT: “We still see capacity for a little more growth, but pretty modest, and then in our own energy outlook it begins to plateau. And that results then in this call on Opec.”

UK oil production is set to suffer a dramatic decline from today’s 1.7m barrels a day to just 1.0m b/d in 2012, according to the IEA.

The IEA estimates Opec would have to supply about 36.2m b/d in 2012, up from today’s 31.3m b/d. That would reduce the oil cartel’s spare capacity to a “minimal level” of 1.6 per cent of global demand, down from 2.9 per cent in 2007.

Additional reporting by Ed Crooks in London

Copyright The Financial Times Limited 2007