Shortfall in Middle East oil investment could push up prices

A  potential shortfall in investment in production in the Middle East could create a $15 spike in the oil price by 2025, the energy arm of the Organisation for Economic Cooperation and Development (OECD) said.

The world will need to invest $40 trillion in energy supply and $8 trillion on energy efficiency by 2035 to meet growing demand and falling output from mature sources of energy, the International Energy Agency (IEA) said in a report.

A large proportion of this will need to come from the Middle East, as a rise in non-OPEC production such as US shale oil starts to lose steam in the mid-2020s.

But the IEA was wary on prospects for a large enough increase in investment from the region. If production does not increase as needed, it will raise oil prices, the report said.

“If investment fails to pick up in time, the resulting shortfall in supply would create tighter and more volatile oil markets, with prices that are $15 per barrel higher on average in 2025.”

Brent crude oil is trading at around $109 per barrel, and has been in a relatively tight range since November. It reached as high as $117 per barrel in 2013 and $128 per barrel in 2012.

The IEA said investment in energy production was over $1.6 trillion in 2013, more than double in real terms than 2000, and that $130 billion was spent to improve energy efficiency.

Investment in renewable sources of energy rose to a peak of $300 billion in 2011 from $60 billion in 2000, but has since fallen to $250 billion for 2013.

More than four times this, $1.1 trillion per year was spent on the extraction and transport of fossil fuels, oil refining and the construction of fossil fuel-fired power stations, the report said.

Of the $40 trillion that will need to be spent by 2035, less than half will be spent on meeting growth in demand.

Of the total investment in upstream oil and gas spending of more than $850 billion per year by 2035, gas will account for most of the increase. Over $700 billion is expected to be invested in the liquefied natural gas (LNG) sector alone during this period.

The IEA warned that more gas might not lead to much lower prices.

“The expectation that a surge in new LNG supplies will totally transform gas markets needs to be tempered by recognition of the high capital cost of LNG infrastructure, with transportation typically accounting for at least half of the cost of gas delivered over long distances,” the report said.

For Europe’s power markets, the IEA warned that a shortfall of investment could threaten reliability of electricity supplies.

“Europe requires more than $2 trillion in power sector investment to 2035… If this situation persists, the reliability of European electricity supply will be put at risk,” the IEA said.

Spending on renewable sources of energy and energy efficiency will not be enough to meet targets on climate change stabilisation goals, the report said.