IEA World Energy Outlook 2012

The International Energy Agency (IEA) released their World Energy Outlook 2012 report today.  The big news about this forecast is that they predict that by 2020 the US will be the largest oil producer in the world, and by 2030 the US will return to being a net oil exporter.  The last time the US was a net oil exporter was in the late 1940s.  I've written about the WEO report before.  I said then that I found the forecasts improbable.  I still do, and for the same reason.  The numbers in the report are generated from the IEA's World Energy Model (WEM).  In the documentation for that model we find:

The main exogenous assumptions concern economic growth, demographics, international fossil fuel prices and technological developments.... Demand for primary energy serves as input for the supply modules.

As a modeller myself, I've always complained bitterly about this structure.  In effect, it allows the people using the model to: (1) assume a politically acceptable level of growth; (2) work backwards to the supplies and prices of energy necessary to produce that growth; and (3) assign production levels to various sources in order to produce the necessary supplies and prices.  In past years the IEA assigned large amounts of supply growth to the OPEC countries.  Now that OPEC has suggested that they won't be providing large increases in production, the IEA forecasts that tight oil in the US (plus natural gas liquids) will provide the needed increases.  What's missing in this picture?  There should be a feedback loop that links primary energy production costs to supplies and prices.  Producing a million barrels per day over decades from tight US formations such as the Bakken require lots of new wells to be drilled essentially forever.  Money spent on drilling is not available to the rest of the economy.  Energy supplies and prices need to be a part of the economic model, not specified outside of it.

The graph to the left is an example of the kind of linkage that I'm talking about [1].  Since the 1970s, each time that US expenditures on crude oil have increased sharply at levels from above or reaching 4% of GDP, a recession has followed.  People have built models with energy as part of the economy for decades.  The model in Limits to Growth is probably the best-known of the group.  Ayres and Warr have published a considerable amount of work where the availability and cost of energy are a core part of the economic model.  Such models seem to yield pretty consistent results: without "then a miracle happens" technology intervention or new cheap sources of oil, we are living in the years where economic output peaks and begins to decline.

 Over the last few years, the IEA forecasts have shown a lot of change from year to year.  This year there's a big swing in oil (and near oil) production away from OPEC to the US.  Big swings don't give me much confidence in the underlying models.


[1]  Credit: Steven Kopits of Douglas-Westwood, testifying before the US House Subcommittee on Energy.