Despite warnings, oil usage expected to increase

By James Kanter

Monday, July 9, 2007

PARIS: Despite four years of high prices and increasingly dire warnings about climate change, a new report Monday predicted that world oil demand would rise faster than previously expected over the next five years while production slips, threatening a supply crunch.

"Demand is growing and as people become accustomed to higher prices they are starting to return to their previous trends of high consumption," said Lawrence Eagles, the head of oil markets analysis at the Paris-based International Energy Agency. "It's important that we have more investment and a greater emphasis on energy efficiency."

The pressures on fuel supplies are growing because booming Asian economies are using more fuel to power their prospering manufacturing industries and to supply growing numbers of automobiles amid a spurt in consumerism.

Rapid growth of the petrochemicals sector and low-cost airlines are other important factors lifting demand.

Supplies are being squeezed by a scarcity of modern oil refining facilities as well as sufficient staff to operate them. Supplies also are a concern because of deteriorating production of oil from countries outside the Organization of Petroleum Exporting Countries, the price-setting cartel operated by the world's biggest producers.

The world "needs more than three million barrels per day of new oil each year to offset the falling production in the mature fields outside of OPEC," Eagles said.

Analysts said that behind the overall numbers were signs that the energy habits of the planet were moving in two distinct directions.

In developed countries, and in particular in the European Union, obligations agreed to by governments to conserve energy and use renewable sources of energy - both to reduce carbon dioxide emissions and to maintain energy security - are expected to ease pressure on oil supplies.

But that trend is being offset by rapidly developing nations. While they still consume far less energy per capita, they also are manufacturing goods for rich countries and increasingly are adopting heavily energy-consuming lifestyles, including air conditioners, refrigerators and cars.

"My view is that energy consciousness will figure strongly in Western countries and could contribute to demand decrease, but it's not at all sure that we will see the same trends in China and India," said Colette Lewiner, global leader for energy at Capgemini in Paris.

In its report, the International Energy Agency, which advises 26 industrialized countries, said that global oil demand would rise by an average 2.2 percent a year from 2007 to 2012, up from a forecast in February 2007 of 2 percent annually from 2006 to 2011.

Developing world and emerging industrialized economies will see their share of world oil consumption rise from 42 percent of global oil demand to 46 percent by 2012, the report said.

Eagles welcomed progress in Europe and Asia, where governments are mandating more efficient cars. He said that the "United States is very clearly coming to the point where there would be a landmark change in fuel efficiency policies."

He also welcomed ramped up investment in refining capacity across the world, saying that could help exert some downward pressure on prices over the next three years. But those effects are likely to be short-lived, Eagles said.

Beyond 2010, Eagles warned, "tightness in OPEC's spare capacity will reassert itself."

And by 2012, he said, there would either have to be limits on demand or additional supplies in order to avoid price increases.

Eagles also gave a stark warning that biofuels - a renewable source of energy produced from plants - were unlikely to be a quick, silver-bullet solution.

Factories to make biofuels are becoming commonplace but agricultural products that are the basis of the fuels are - like crude oil in some parts of the world - becoming scarcer.

Prices of this feedstock including corn, sugar, soybeans, wheat and palm oil have risen sharply, making the production of biofuels increasingly expensive.

"Although we have a lot of policy statements on biofuels in many countries, the policies and mandates aren't fully in place at this point so we are not sure that this supply is going to be there," Eagles said.

By 2012 biofuels will still only account for only 2 percent of global oil supplies, the International Energy Agency said.

Yet another factor weighing on fuel supplies is periodic but severe problems in supplies of cleaner-burning natural gas, which has supplanted fuel oil in many industries over the past quarter-century.

But natural catastrophes such as Hurricane Katrina and Hurricane Rita in 2005, which knocked out U.S. gas production, and political decisions such as when Russia turned off gas supplies to neighboring countries in 2006, have led to renewed demand for fuel oil - putting yet more pressure on oil supplies.