Energy security threatened by low oil prices

Paul Snell is managing editor at Supply Management
posted by Paul Snell
in Risk
18 November 2015

Continued low oil prices could put energy security at risk, according to the International Energy Agency.

In a report the organisation said higher demand for oil could only be met if low cost production was developed, primarily in the Middle East. This greater dependence on Middle Eastern oil – to a level not seen since the 1970s – would increase concerns about energy security. Asian countries, which rely on imported oil, would be at particular risk.

Fatih Birol, IEA executive director, said: “It would be a grave mistake to index our attention to energy security to changes in the oil price. Now is not the time to relax. Quite the opposite: a period of low oil prices is the moment to reinforce our capacity to deal with future energy security threats.

The World Energy Outlook said the sharp drop in oil prices this year will rebalance the market with higher demand being met with lower production. It predicted, taking into account policies and measures that have been already been implemented by the sector, oil will cost $80 a barrel in 2020, rising to $128 a barrel by 2040 in today’s currency.

But in a low price scenario – which would primarily be caused by lower global economic growth – prices would remain around $50 to $60 a barrel by the end of the decade, rising to around $85 in 2040. Lower prices would also stimulate demand, which would rise to 107 million barrels a day by 2040, 3.7 million higher than in a “normal” scenario.

Another consequence of a low price future would be less incentive to invest in more fuel efficient vehicles. The study predicted this would mean the world would miss out on savings of 15 per cent, which equates to $800 billion.

The IEA also predicted the industry would need to invest $750 billion a year by 2040, with 85 per cent of this sum to compensate for declining production at old fields rather than servicing higher demand.

The report also said natural gas consumption had risen by 50 per cent, thanks to increased demand from China and India. But growth could be held up by efficiency policies, competition from renewable energy, and the high cost of projects such as pipelines and liquefied natural gas (LNG) projects.

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