Oil price ‘depends on exploration funds’

By Anna McLauchlin

Date: 28/10/04

THE world will not run out of oil in the next 25 years, but lack of investment in getting to it could see prices remain high, the chief economist of the International Energy Agency (IEA) Fatih Birol has warned.

Presenting the World Energy Outlook in Brussels, Birol said that serious investment will be needed to tap the increasing amount of oil that will be needed in the coming years. The IEA estimates that global oil demand will increase by 1.6% per year until 2030, from 77 million barrels per day now to 121m barrels per day. The problem, Birol says, is that up until now most of the world's oil has been found in the US, whereas most of the undiscovered reserves are located in the Middle East, Russia and Latin America.

Access to much of the world's reserves is blocked for foreign companies, for example in Saudi Arabia and Mexico. "The key question is not whether money can find oil but whether oil can find money," Birol said, adding that this restriction is one of the main reasons for the current high oil prices.

"It's true that demand increased in 2004 but this has happened in the past and it didn't result in high prices," he said. "The biggest reason is that there is not enough supply coming to markets, especially in the Middle East, which makes the market nervous and leads to high prices. We need investment for the oil to come through."

But he admitted the lack of supply could also be blamed on the "political agenda". IEA's energy forecasts assume average oil prices of &036; 25 (19.70 euro) per barrel, but the IEA has also produced a 'high oil price case' assuming average prices of &036;35 (27.60 euro) per barrel in which case it claims oil demand would be about 15% lower than in its standard forecasts.

Birol also warned that the European Union should diversify its energy demands or risk dependency on Russia and other politically sensitive areas.

According to the world economy outlook, the EU will see a marked shift in its energy mix in the next 25 years. Gas and renewables will overtake coal and nuclear use. "This means that where the EU currently imports 49% of its natural gas, high demand will see this figure rise to 80% by 2030 and the biggest supplier will be Russia," said Birol. "Politicians should reflect on this carefully."

The IEA's work with the International Monetary Fund has shown that Russia is relying more and more on oil and gas revenues, Birol said. "It's risky to depend on them because Russia may want to put up its prices to make bigger revenues."

The answer, Birol said, is diversification. "We can change this outcome with alternative policies," he insisted.

The IEA recommends prioritising EU energy laws such as the renewables directive which aims to increase the amount of electricity produced from renewables by 22% by 2010 and the CHP directive which should increase energy efficiency through combined heat and power.

IEA also recommends that the European Commission tighten up its control on car manufacturers and increase the use of biofuels across the EU.

If its recommendations are followed, the IEA says European oil savings by 2030 will be the equivalent to the current production of Venezuela and its dependency on imports will be reduced.

Presenting the World Energy Outlook the chief economist of the International Energy Agency (IEA) Fatih Birol warned that the world would not run out of oil in the next 25 years, but lack of investment in getting to it could see prices remain high.

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