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IEA Warns Of Energy Crunch

The International Energy Agency today warned of tight oil and natural gas supplies in the coming years in its “Medium-Term Oil Market Report.” The IEA, a Paris-based intergovernmental organization founded in 1974 in the wake of the oil crisis, acts as an energy policy advisor to 26 member countries (including the United States). In the report, the Agency forecasts that while demand for oil and natural gas is expected to grow through 2012, the Organization of Petroleum Exporting Countries (OPEC) spare capacity is expected to remain constrained until 2010, then shrink to minimal levels by 2012. In addition, the IEA predicts supply increases from non-OPEC oil producers will start receding in 2009. Natural gas markets will also be tight because of inadequate supply increases, leaving the consumer with limited options. According to the report:

“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.”

The Wall Street Journal said this afternoon that, “The IEA doesn’t forecast oil prices, though its conclusions imply that consumers should expect continued upward pressure on the cost of energy.” Back on July 2, the Christian Science Monitor looked at the present effects of high energy costs on the American household, and had this to say:

“Energy is now sucking money out of Americans’ bank accounts at a record level — hitting $612 billion at an annual rate in the month of April, the last month of data. Over the past two years, energy bills as a share of income have risen and are now at their highest point since 1987, but still below the levels of the 1970s and early 1980s. For low-income households, some economists estimate energy consumption as a percentage of income is closing in on 10 percent.”

Mark Zandi, chief economist at Moody’s Economy.com, told the Monitor that the higher cost of energy “shows up in weaker real incomes, since it results in higher rates of inflation. If it rises much more, it will become a significant problem, particularly for lower-income households.”