Has the U.S. Been Playing Loose with Oil Market Data?

by: Justice Litle

Jim Morrison once sang about “Weird scenes inside the gold mine.” Perhaps it should have been weird scenes inside the energy agency.

The International Energy Agency, or IEA, is a 35-year-old quasi-political body headquartered in Paris, France. It was set up in 1974 in response to the budding energy crisis. The IEA’s main focus, as one might expect, is tracking the global oil market. Other energy markets are tracked and studied also.

Every year the IEA publishes its highly anticipated “World Energy Outlook,” or WEO, which runs hundreds of pages long. For the 2009 WEO, just recently released, the executive summary alone is 17 pages.

The weirdness came earlier this week when the U.K. Guardian, a British newspaper, accused the IEA of inflating oil reserves in its projected forecasts.

“The world is much closer to running out of oil than official estimates admit,” The Guardian reports, “according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying."

The Guardian then went on to suggest that “serious questions” had been raised about the accuracy of the IEA’s forecasts. Of particular concern was the latest report, with the U.S. taking an “influential role” in “encouraging the watchdog to underplay the rate of decline... while overplaying the chances of finding new reserves.”

Were the IEA to be truly fudging the data, this would be major news, as a number of sovereign governments rely heavily on the IEA for stats. Indeed, for many facts and figures regarding global oil consumption, there is nowhere else to go.

Sharp Response, but a Yawn From Crude

The IEA’s response to the explosive allegations was swift and direct.

Nobuo Tanaka, the IEA’s executive director, said peevishly that “We have always been warning and warning,” and that it is no secret the world will need “45 million more barrels per day” by 2030.

Fatih Birol, the IEA’s chief economist, declared himself “surprised and disappointed” at the charges, adding that he was “up to now criticized as being too alarmist.”

Biroh also pointed out that last year’s outlook was “a wake-up call to governments,” and that the IEA’s decline rate numbers “are the highest among our peers.”

And what of that ultimate judge, the oil market itself? Did the much-feared panic buying materialize upon word of a potential cover-up? No. Crude oil, locked in a mostly sideways trading range below $80 per barrel as of this writing, hardly responded at all to the news.

The chart at right (courtesy of the WSJ) shows IEA projected oil demand heading out to 2030 for the big three – the United States, Europe and China. (The idea of seeing two decades into the future is absurd on its face, but we’ll leave that alone for now.)

Note that the green bar, representing oil demand for the United States, is the tallest by far (and remains so in 2030). The red bar, representing China demand, is taking off like a rocket, while blue Europe’s rate of oil consumption slowly drifts down.

Part of the reason the oil market yawned, in the short term, is lackluster American demand prospects. Because America is such a huge consumer of oil in the here and now, weakness on the home front is harder for oil to overcome. U.S. distillate stocks – seen as a good proxy for oil demand overall – are at a 26-year high, which means consumers and businesses are using less of the black stuff. Looking ahead a few quarters, U.S. oil demand is expected to fall in 2010 for the first time in decades.

Four Areas of Influence

One might say the oil market is responding to five areas of influence these days:

• Trends in the U.S. dollar (and other major paper currencies).

• The short-term supply and demand outlook (dominated by a weak U.S. economy).

• Long-term forecasts for rising emerging market demand (particularly China).

• “Peak oil” concerns and the potential dwindling of long-term energy reserves.

• Geopolitical concerns and the “fear” premium (dormant now, but with potential to surprise at any time).

Given these factors, the mix suggests downward pressure on oil in the near term (as the dollar shows sign of bottoming and the U.S. economy tails off), with renewed upward pressure in the mid to longer term.

The Oil Drum, a popular energy Web site, shows another reason for concern in the chart below (compiled from IEA data).

Roughly 40% of the world’s oil supply comes from OPEC members (Organization of the Petroleum Exporting Countries). The rest comes from non-OPEC members.

The chart above shows how non-OPEC supply actually peaked a number of years ago, with the high-water mark for production hitting some time in late 2003.

Others may disagree, but to your humble editor oil looks vulnerable here. That is very much a shorter-term observation, however. In the longer term, oil’s rise seems as assured as the dollar’s ultimate demise.

What’s the Motive?

If the Guardian allegations are true, why would the United States be pressuring the IEA behind the scenes? Perhaps because weakness in the U.S. economy is the Achilles heel of the whole “V-shaped recovery meme” that has whipped investors into a frenzy.

The bulls have managed to fix their gaze on the über-stimulated Chinese economy – somehow overlooking the major red flags – while averting their eyes from the unfolding horror that is the U.S. economy. Were the price of oil to rise too far, too fast, it would become all the harder for Washington and Wall Street to ignore the intense pain of Main Street.

In that light, a few gentle nudges in the IEA’s ribs would not be a surprise. As Morrisey sang in “The Lazy Sunbathers,” the bulls are now “too jaded to question stagnation”... and the powers that be want to keep it that way.