The International Energy Agency released its 2012 World Energy Outlook this month and it caused quite a stir in the mainstream media. The mainstream headlines were focused on the fact that the IEA said that thanks to the shale oil revolution, by 2020 the United States will be the world's largest producer of oil.
The message from most media sources that I saw was basically that our oil supply worries are over. We could forget about $100 per barrel oil prices and we could forget about the concept of Peak Oil. The mainstream media basically seemed to think that the United States is going to have a glut of oil before we know it. I saw several articles that even referred to the United States becoming an oil exporter.
Hold on a minute, I say.
I think the media missed the point of the IEA report. Or perhaps more accurately didn't read further than the first headline to get to the main point.
Because when I read what the IEA has to say I still don't feel too comfortable about the ability of the world to create enough oil production on a daily basis over the coming decades to keep up with where global demand is going.
According to the US Energy Information Agency, in September of this year the United States imported 315,000,000 barrels of oil. That is 10.5 million barrels of oil per day that the country is importing.
Here is what the US oil production per day actually looks like:
The United States is producing less than 7 million barrels per day and importing considerably more than that. I think it's a little early to start thinking about oil exporting.
The United States could very well though become the world's largest oil producer over the next decade thanks to unconventional oil development. I don't doubt that at all. To do that the country would need to overtake Saudi Arabia which currently produces 10.5 million barrels of oil per day.
Should that happen and the United States exceeds the Saudi's 10.5 million barrels per day of production, the USA would still be importing six or seven million barrels of oil if demand stays at current levels.
There is good news about American oil production to be sure, but we need to be realistic and know that the United States is still incredibly reliant on foreign sources of oil and will be for a long, long time to come.
Everything Riding on Iraq
What I believe has been missed by most of the media is that according to the IEA, for the world to keep daily oil supply and demand in balance through 2035 we are completely reliant on one country. That country is Iraq. Here is what the IEA is assuming about that troubled country's oil production:
Much is riding on Iraq's success
Iraq makes the largest contribution by far to global oil supply growth. Iraq's ambition to expand output after decades of conflict and instability is not limited by the size of its resources or by the costs of producing them, but will require coordinated progress all along the energy supply chain, clarity on how Iraq plans to derive long-term value from itshydrocarbon wealth and successful consolidation of a domestic consensus on oil policy.
In our projections, oil output in Iraq exceeds 6 mb/d in 2020 and rises to more than 8 mb/d in 2035. Iraq becomes a key supplier to fast-growing Asian markets, mainly China, and the second-largest global exporter by the 2030s, overtaking Russia.
Without this supply growth from Iraq, oil markets would be set for difficult times, characterised by prices that are almost $15/barrel higher than the level in the New Policies Scenario by 2035.
Am I the only one who finds that a little disturbing? The IEA explicitly states that without this supply growth from Iraq oil markets would be set for difficult times, and prices would be $15 per barrel higher than what the IEA is projecting. And what the IEA is projecting for oil prices by the way is:
Growth in oil consumption in emerging economies, particularly for transport in China,India and the Middle East, more than outweighs reduced demand in the OECD, pushing oil use steadily higher in the New Policies Scenario. Oil demand reaches 99.7 mb/d in 2035, up from 87.4 mb/d in 2011, and the average IEA crude oil import price rises to $125/barrel (in year-2011 dollars) in 2035 (over $215/barrel in nominal terms).
Yes, that is $215 per barrel even if Iraq goes on one of the greatest oil production growth runs in the history of the world.
I've been watching the headlines from Iraq like I'm sure many others do. The violence there is still at shocking levels. The entire region looks less stable now that at any time that I can remember. I don't believe for one second that Iraq can live up to the assumptions the IEA is using. I'm concerned that the entire OPEC group of countries will actually have less production in the years ahead should the troubles in Iraq, Syria and Egypt spread.
I'm a Canadian. I lived abroad for a while but have returned home to raise my family. And with what I see from this IEA report I think that my kids are going to be happy that I did. Canada really will be the new Saudi Arabia because we are going to have an enormous amount of oil to export and we are going to be doing it at very high prices.
I think the implications from the Iraq "hole" in the IEA story for investors is that getting long oil (USO) through some sort of index fund is not a bad idea. An even better idea I think is to get long the Canadian stock market through the index fund for the main exchange (ISPTF.PK) or the Venture exchange (OSPVX). If I'm right Canada is going to be experiencing an economic boom and being long both our companies and our currency will be rewarding.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.