World Energy Outlook

It was barely 10 years ago that a well-reasoned cover story in The Economist told us we were “drowning in oil” and that its price could drop by more than half to $5 a barrel. As everybody now knows, prices rose tenfold before peaking last summer. There are just so many moving parts to the energy market that making forecasts is a mug’s game. If exhaustive detail is a measure of credibility, though, few sources equal the International Energy Agency’s World Energy Outlook, published yesterday.

Coinciding with the first time since 1981 that global energy use has declined, 2009’s report is not complacent about future energy supply and environmental challenges. Like many forecasts, though, it makes the mistake of extrapolating recent trends too freely. For example, the IEA expects global oil production to rise from last year’s 85m barrels to 105m by 2030 while acknowledging that about two-thirds of this will come from fields yet to be found or developed. But at what cost?

In just the past decade, exploration spending has nearly tripled in order to maintain a similar rate of supply growth. Leaving aside arguments that the IEA’s forecast skirts the edge of what is geologically feasible, incremental barrels are getting pricier to find and, once out of the ground, are more coveted. The IEA expects real oil prices to hit $87 a barrel by 2015 and $115 by 2030 to make this all possible. What about the possibility that supply will falter and that a far higher clearing price will instead do the trick? Living with $300 crude is no more outlandish than suggesting a decade ago that $80 would be the new normal. The payoff from conserving oil could soon outstrip that of drilling for it.

Just as forecasters failed to appreciate the market’s reaction to low prices a decade ago, they may be underestimating how we will react to increasingly expensive oil tomorrow.