Nobuo Tanaka, the executive director of the International Energy Agency, is quoted in the FT this morning as saying that “it would be in the interests of producers and consumers if oil stayed at its present level of about $45”.
This strikes me as a bit odd. A whole range of senior oil industry figures has been warning that with prices having fallen off a cliff since last summer’s peak of $147, investment in new production capacity has fallen sharply as well – setting the stage for a potential supply crunch as soon as the world begins to emerge from the downturn and demand starts to pick up.
Nick Butler, for example, suggested in December that a price band of $50-$75 a barrel is needed to ensure that sufficient new investment comes on stream to meet demand (which the IEA projects will rise from 85m barrels a day in 2007 to 106m mb/d by 2030). Total CEO Christophe de Margerie, meanwhile, said in October last year that if the oil price fell to $60 a barrel and stayed there, “a lot of [new] projects would be delayed”.
Strangest of all, it’s less than a month since Nobuo Tanaka himself was briefing heavily about the risks of a future supply crunch resulting from under-investment, and stressing that he expected demand to rise by about 1 mb/d from next year onwards.
So what’s going on?
Well, it’s certainly the case that a sudden resumption of high oil prices would do nothing to help prospects for economic recovery – and with OPEC ministers about to meet in Vienna, the IEA may well be worried about the effect that a further supply cut could have on prices.
OPEC, for its part, is worried about how much further demand may fall (there was a 4% slide in oil prices overnight as markets digested more grim employment data from the US). With many OPEC governments feeling the pinch (given that their public spending plans built around much higher oil price assumptions than are currently the case), they clearly have a motive to cut prodution further – exactly what consumer countries don’t want.
Problem is, though, that all this leaves investors facing serious uncertainty about the price outlook – and hence with less of an incentive to invest. Until now, Nobuo Tanaka’s been one of the most consistent voices warning of the need to keep the long term in mind. (One wonders whether the oil importing country officials on the IEA’s Governing Board have been instructed to tell him to back off.)
As OPEC and IEA governments chase their tails about the short term price outlook, it remains the case that both sides fundamentally share a common interest in bringing more long term predictability to the oil price – hence Nick Butler’s call for them to agree a price band (perhaps via the IEF). As I’ve argued here before, though, there’s also another way of achieving more predictability on demand for oil: doing a comprehensive, long-term global deal on climate change, with emission quotas for all countries rather than just developed one. That would give investors far more clarity about future demand for oil, and thus create a framework for bringing the right amount of new production on stream – at the same time as squaring this with the need to control greenhouse gas emissions.
‘Course, that would entail the need to agree an equitable way of sharing out the global emissions budget – a question that remains firmly filed under ‘too difficult’ as the Copenhagen climate summit approaches…