What oil bust?

The International Energy Agency says it is “leading a new era of international energy co-operation.” There’s clearly a lot of leading to be done, with Russia using its oil to wage war on Ukraine, but you can hardly blame the IEA for trying. Earlier this month, it produced its bumper oil annual, predicting that “oil markets are on course for a major surplus this decade”. The Times reported this as a “staggering” surplus, while OPEC+, the oil producers’ cartel, called it “dangerous.” Certainly, if the IEA is right, there’s a big danger to the producers’ balance sheets.

It is quite brave of the IEA to keep sticking its neck out over prices, year after year, since its record is, well, mixed. In 2019, it concluded that there was “no peak in oil demand in sight”. The next year, Covid had dented that expectation, and the verdict was “demand expected to contract.” By 2021, “demand is set to rise every year through 2026”. This bold forecast was qualified with “stronger policies and behaviour changes could bring on a peak in demand soon.” Well, who’da thunk it?

It is too easy to mock others’ forecasts, as any forecaster knows. But let us suppose that this time the IEA is right, while OPEC+ is just whistling to keep its spirits up, and that we are headed for a lasting glut of oil (and gas). The obvious consequence will be falling prices. For the world’s most important commodity, that would have quite an impact. The massive transfer of wealth from a few producers to everyone else would stimulate growth all over the place, so bring it on.

Yet it is not only the producers who would suffer. Cheap oil would deliver a body-blow to net-zero ambitions everywhere. The previous forecasts for the cost of greening the UK’s electricity grid have already been shown to be wishful thinking, while almost the only British buyers of electric cars are companies, driven there by the overwhelming tax attractions. The industry is now asking for more tax breaks to try and stimulate demand. The IEA itself acknowledges that a 15 per cent slowdown in world takeup of electric vehicles would ruin its present forecasts. A fall in the oil price, reflected in the price at the pumps, would expose these cars to an even harsher environment.

We used to worry that “peak oil” meant that we were running out of the stuff. This has morphed into a forecast of chronic surplus, and “stranded assets.” The clever boys at Capital Economics (better at forecasting than most) expect demand to start falling in 2030, and to decline rapidly thereafter. Well, perhaps, but the world will always need more energy. Oil is the principal source. Windmills and sunbeams will never be enough. 

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