The International Energy Agency (IEA) acts as energy policy advisor to 26 Member countries in their effort to ensure reliable, affordable and clean energy for their citizens. Founded during the oil crisis of 1973-74, the IEA’s initial role was to co-ordinate measures in times of oil supply emergencies. They IEA is a sought-after source of energy data by experts around the world.

Each month they publish the Oil Market Report, a report on short term supply, demand, energy stocks and outlooks. Periodically, they publish reports with longer term outlooks. The Medium Term Oil Market Report is one such publication that goes beyond the traditional short term market analysis and looks to the future of energy. Today, the IEA has just published their latest Medium Term Oil Market Report which looks at the market probabilities through 2012. The report is not encouraging.

One week ago, prior to the release of this report, the chief economist of the International Energy Agency, Fatih Birol, gave a surprisingly direct interview with the French daily Le Monde. In the interview he stated, "If Iraqi production does not rise exponentially by 2015, we have a very big problem, even if Saudi Arabia fulfills all its promises. The numbers are very simple, there's no need to be an expert."

The first paragraph of the just-released Medium Term Oil Market Report states, to wit,

"Despite four years of high oil prices, this report sees increasing market tightness beyond 2010, with OPEC spare capacity declining to minimal levels by 2012. A stronger demand outlook, together with project slippage and geopolitical problems has led to downward revisions of OPEC spare capacity by 2 mb/d in 2009. Despite an increase in biofuels production and a bunching of supply projects over the next few years, OPEC spare capacity is expected to remain relatively constrained before 2009 when slowing upstream capacity growth and accelerating non-OECD demand once more pull it down to uncomfortably low levels. It is possible that the supply crunch could be deferred – but not by much."

This is certainly not a positive start. The remaining 80 pages or so are crammed with charts, graphs and analysis that virtually confirms what many "peak-oilers" have been preaching for some time -- we're probably there. We've hit the peak.

The report issues a veiled warning:

"Global oil product demand is forecast to expand by 1.9 mb/d or 2.2% per year on average, reaching 95.8 mb/d by 2012. [emphasis added] Growth is driven by the stronger oil demand growth in non-OECD countries, particularly in Asia and the Middle East, where demand will grow more than three times faster than that of the OECD economies. These countries are moving towards the threshold level of income (around $3000 per capita) where their consumers buy cars and energy-consuming white goods."

In analyzing global supply of non-OPEC producing countries, the report remarks,

"Certainly our forecast suggests that the non-OPEC, conventional crude component of global production appears, for now, to have reached an effective plateau, rather than a peak. Having attained 40 mb/d back in 2003, conventional crude supply has remained unchanged since and could do so through 2012. While significant increases are expected from the FSU, Brazil and sub-Saharan Africa, these are only sufficient to offset declines in crude supply elsewhere. Put another way, all of the growth in non-OPEC supply over 2007-2012 comes from gas liquids, extra heavy oil, biofuels (and, by 2012, 145 kb/d of coal-to-liquids from China). As overall non-OPEC liquids capacity increases, this plateau reduces the share of non-OPEC conventional crude supply from 77% in 2000, to 74% in 2006 and 67% in 2012."

The train wreck in this statement is that "conventional crude supply has remained unchanged since [2003] and could [emphasis added] do so through 2012. "...could do so through 2012" is not a prediction. It's a subjective disclaimer. In a Hubbert curve, plateau's generally don't last for six years...but hey, I'm not a petroleum geologist and I could be wrong.

In estimating supply decline rates over the coming six years, the report states,

"...the implied net non-OPEC decline rate for baseload production is around 4.6% per year. This covers not only fields in decline, but also older supply which is at or approaching plateau. With net decline from OPEC assumed at 3.2% per year, this gives a global annual decline of 4%, suggesting that 3.2 mb/d of new production must be found each year just to stand still." [emphasis added]

Does anyone out there think this is going to happen? If the world is currently producing 88 mb/d, and we need an additional 3.2 mb/d to stand still, then where is the increase in production coming from to deliver the predicted demand of 95.9 mb/d by 2012? The stated demand increases, in addition to the "stand still" amount will require additional new supply of about 11 mb/d, (a 12.5 % increase over current daily production) within the coming five years! Remember, no major oil discoveries have occured since the 1960's.

In the report's analysis of OPEC supply, they open the section with:

"OPEC producers are expected to add a net 4.0 mb/d to installed crude capacity during 2007-2012. The years 2008 and 2010 see particularly strong growth, when new project start-ups drive OPEC capacity higher by over 1.0 mb/d in both years. The forecast takes account of new capacity investments and net decline from older fields (decline rates are assumed to range from 1-5% pa for onshore fields in the Mideast Gulf, through to 12-15% pa for deepwater fields). Overall, net decline for the group as a whole averages 3.2% annually [emphasis added], lower than the 4.6% evident from the non-OPEC forecast. This reflects in part the predominance of lower-decline onshore and shallow water production in the total (albeit deepwater production from Angola and Nigeria is taking on greater importance). OPEC therefore faces the task of replacing some 1.1 mb/d each year just to sustain capacity at existing levels."[emphasis added]

Are these forecasts telling us that "peak" has been reached? The report's Executive Summary ends with another warning:

"But the oil market cannot be looked at in isolation. Not only does oil look extremely tight in five years time, but this coincides with the prospects of even tighter natural gas markets at the turn of the decade. Over the past 25 years there has been substitution away from fuel oil and towards natural gas. However, when natural gas supplies have been insufficient or there have been supply problems (such as those seen following Hurricanes Katrina and Rita in 2005, Russia in 2006), fuel oil has been the natural substitute. By the end of the decade, such flexibility may be constrained, producing upward pressures on all hydrocarbons. Slower-than-expected GDP growth may provide a breathing space, but it is abundantly clear that if the path of demand does not change on its own, it may well be driven to change by higher prices. [emphasis added]"

As Randy Leonard of Salon stated in his article today, "If it smells like peak oil, it probably is."