IEA Doubles Long term Crude Oil Price Forecast

While oil prices continue to fall on weakening economic data the International Energy Agency (IEA) has doubled its long term estimate for oil prices to over $200 from $108 last year.  They also boosted the amount of projected investment necessary to serve global energy demand over the time frame by about 18% from $22 Trillion to $26 Trillion.  At the same time they cut long term demand from 116MM barrels a day in 2030 (up from 85MM barrels today) to 106mm barrels.

I find it pretty comical that in one year the IEA model has projected a 100% increase in its long term price fo oil - mostly attributed to lower economic demand over the same period as was projected in last year’s World Energy Outlook.  As someone that used to be required to project things for a living it really makes me wonder about the IEA projection model  - is the model that sensitive to changes in economic inputs?  Or has the world economic outlook for the U.S., Europe, which are still the largest oil users - and will be for the forseeable future - that much more dire than 12 months ago given a 22 year tail?  And this spike in price comes despite cutting global demand for oil by about 10%. 

This is a problem that a lot of long term models have - which is probably why oil traders ignored this news - sensitivity  to small changes in early year inputs is so high in the out years that the resulting answers are pretty useless.  The primary reason for this is that as you move toward out years there is no dampening effect on the compounding of growth rates, prices, subscriber growth - whatever you happen to be projecting.  If you were to dampen those rates down you end up making model inputs which aren’t realistic when taken as a snapshot just to keep the end number looking like its “in the ballpark”.  In the real world the dampening occurs through moderate to strong directional changes based on market fundementals introducing new paths for growth, or interspersing negative growth into a long term trends (which have large impacts on compounding and therefore the end number).  Of course there is no way to actually project those kind of changes without a crystal ball - so we get long term projections that swing by 100% in a year an nobody bats an eye.

The $108 number was most likely too low given usage trends - the $200 number?  Who knows?  It could be low by another 100% or high by 50%.  I am guessing low.

One last piece of wierdness is that nearly all the growth in usage in the projection comes from China and India.  I am not certain how the U.S. absorbs 20 years of population growth without increasing liquid fuels demand.  Certainly the steady uptick in U.S. oil usage has stalled since 2005 - but if you look at the underlying data gasoline usage has not - it has continued to climb (though it should drop in 08 for the first time since the 70s) - there is only so much shifting from home heating and jet fuel that we can absorb before auto transportation and trucking begin to pressure consumption upwards again.  The U.S. population is expected to grow by roughly 25% between now and 2030 to 363MM people according to the U.S. Census Bureau projections.   That would imply a base case of 25% increase in transportation demand based on population alone.  Perhaps we will through some combination of more fuel efficient vehicles or changes in population settlement patterns (more dense living) offset that 25% - but I am not holding my breath.