IEA Report - Trouble for Oil ETFs?

The International Energy Agency (IEA), an energy advisor to rich nations such as the U.S., released its highly-anticipated World Energy Outlook on Tuesday, singling out potential climate change initiatives as a major driver of oil consumption and prices in coming decades. If a major agreement to cut greenhouse gas emissions is signed and implemented in coming years, global crude oil demand could increase by only four million barrels per day by 2030. The increase from current consumption levels of about 85 million barrels to 89 million barrels represents a relatively small bump that could help keep prices lower.

Spencer Swartz of the Wall Street Journal wrote:

A climate-change agreement would help propel industries and consumers toward using energy more efficiently and incentivize the auto industry to develop electric vehicles and other nonoil technologies.

But that prediction comes with a big “if.” The Kyoto Protocol, a UN treaty aimed at combating global warming, is set to expire in 2012, and delegates from nearly 200 countries will be meeting in Copenhagen in December with the goal of devising a successor agreement. There is significant skepticism over the ability of developed and emerging economies to agree on the sharing of burdens associated with reducing greenhouse gas emissions. Without a new climate change agreement in place, the IEA estimates that global oil consumption will rise to 105 million barrels per day by 2030, implying that the presence of an a comprehensive emission reduction plan could result in a 15% decrease in global oil demand.

The IEA also released predictions for oil prices in coming years: crude is expected to cost $100 per barrel by 2020 and $115 per barrel by 2030, reflecting annual price increases of between 2% to 3%, roughly in line with inflation.

ETF Plays On Oil

Any news regarding the future direction of oil prices will have an impact on exchange-traded products such as USO and OIL. But there are several other ETFs that could be interesting investment plays depending on which scenario outlined by the IEA plays out (for more actionable investment ideas, sign up for our free ETF newsletter):

• Emerging Global Dow Jones Emerging Markets Energy Titans Index Fund (EEO): According to the IEA, emerging markets, such as China and Brazil, are expected to account for the vast majority of increases in global oil demand going forward. As these developing economies continue to expand, they will also continue to develop a tremendous need for fuel and natural resources.

• SPDR S&P Oil & Gas Exploration & Production ETF (XOP): The IEA report notes that global drilling investment is expected to decline by nearly 20% (or $90 billion) in 2009, due primarily to delays and cancellations on major projects in Canada. Continued exploration is necessary to prevent a long-term spike in prices, a trend that could give a boost to companies engaged in development of future oil supplies.

• PowerShares WilderHill Clean Energy Portfolio (PBW): Among the main beneficiaries of a global agreement on climate change would be alternative energy producers. PBW invests in stocks of companies engaged in green and renewable sources of energy, including several solar energy firms.

Disclosure: No positions at time of writing.

Comments

[stockferret:]

You don't need a whistleblower to know these guys are on crack. Right now, China consumes about 6 barrels of oil a day per 1000 people. The world average is 32 barrels per 1000. Even if China gets to half the world average (Thailand, Chile, Bulgaria levels) that is an increase of 12 million barrels of oil a day alone. Nevermind any other country that wants a first world lifestyle.

Good luck telling China and India they aren't allowed to have cars.

Nov 10 01:25 PM

[constantnormal:]

Projections that are 20 years out are nothing but fantasies. Nobody can accurately project anything, in any area 20 years into the future.

There are so many status quo assumptions built into this projection that will ultimately be toppled that it is ludicrous. Technologies change, markets change, the global economy changes. And so far as global warming goes, who's to say that a decade from now some process to actively suck greenhouse gases out of the atmosphere will not emerge, that happens to use oil as a working medium? I can indulge in ridiculous fantasies just as much as the IEA.

The IEA is first and foremost, selling advice to rich oil-producers, so one would expect that advice to be heavily tailored to what their customers want to hear.

Nov 11 09:47 AM

[Alan Young:]

"Trouble": demand expanding by "only" 4 million barrels.
REAL trouble: demand expanding by 40 million barrels, with production flat.

Nov 11 10:26 AM