OTC: IEA economist outlines global challenges

China's economic growth poses great uncertainty for the global oil and gas business because it will affect oil supply and demand, said Fatih Birol, chief economist at the International Energy Agency at the Offshore Technology Conference in Houston.

Uchenna Izundu
International Editor

HOUSTON, May 2 -- China's economic growth poses great uncertainty for the global oil and gas business because it will affect oil supply and demand, said Fatih Birol, chief economist at the International Energy Agency at the Offshore Technology Conference in Houston.

The World Bank and International Monetary Fund have continuously underestimated China's economic growth, he said at a panel discussion of current energy challenges and future direction of the business. "The International Energy Agency assumes a 6.7% GDP growth for China over the next 15-30 years as our reference case scenario. Its oil demand now is 7 million b/d and could grow to 11 million b/d using this GDP figure."

Birol cautioned that China expects its GDP growth to be higher, which would mean greater oil requirements. "China wants to move away from heavy industry to light services, and this could affect its oil demand," he said.

Another uncertainty is the lack of clarity on production decline rates for oil fields around the world, Birol added. The IEA estimates that over 150 million b/d of oil will be needed over the next 25 years, raising challenges as to where these supplies would be obtained. Birol said IEA was assuming an 8%/year decline in production rates for the data it has on mature fields. "If this were 9%, then an additional 25 million b/d of oil would be required," he said.

Oil price elasticity is becoming less important, according to Birol, because member countries of the Organisation for Economic Cooperation and Development have become richer and are less sensitive to energy prices changes compared with developing countries. Energy consumption is shifting to developing nations, and their governments are heavily subsidizing prices by about $100 billion/year. "The oil demand is in the transportation sector," Birol said. "Around 98% of growth for oil came from the transport sector, and we can't switch to another fuel more easily."

Birol stressed that vehicle energy efficiency is important to curb spiralling oil demand. "This could have more of an effect than turning to biofuels." He said it was important that the government take the initiative to help develop biofuels, as this could not be left to market forces.

US President George W. Bush has set a goal of using 35 billion gal/year of alternative fuels by 2017, which is a five-fold increase over current consumption. Clay Sell, deputy secretary at the US Department of Energy, said he was fairly confident that R&D by the US government would find economic ways to produce ethanol from cellulose sources rather than corn within the next 5 years. Corn prices have recently jumped causing an outcry in Mexico because corn, which is used to make tortillas, is being diverted to create ethanol and reduce reliance on gasoline, particularly in the US. This has meant that the price of tortillas, a staple in the Mexican diet, has increased four-fold.

Contact Uchenna Izundu at uchennai@pennwell.com.

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