oil refinery saudi arabia

The International Energy Agency has sounded the alarm about a potential oil supply crunch and higher prices as key Gulf producers delay investment in the face of surging US shale output.

In a strident warning against complacency in the oil market, the developed world’s energy body said key Gulf producers have been adopting a “wait and see approach” to investment, because of the perception that the US shale revolution would produce an “abundance of oil”.

“I am really worried that we are giving the wrong signals to the Middle East, which may end up with us not having investment in a timely manner,” said Fatih Birol, chief economist at the IEA.

“The wait and see behaviour is definitely not in the interest of consumers or global oil markets because it may mean significantly higher prices in the future.”

Mr Birol was speaking as the Paris-based IEA unveiled its annual outlook for the energy market. Its 2012 forecast that the US would be a net oil exporter by 2030 helped bring shale oil production to global attention. But this year the organisation downplayed the significance of US production growth, with Mr Birol calling shale “a surge, rather than revolution”.

The IEA still expects US oil output to reduce the world’s dependence on Middle Eastern oil in the near term: it now forecasts that the US will displace Saudi Arabia as the world’s biggest oil producer in 2015, two years earlier than it had estimated just 12 months ago.

But it expects US light tight oil production, which includes shale, to peak in 2020 and decline thereafter, even as global demand continues to grow to 101m barrels a day by 2035, from about 90m b/d today.

Outside the US, light tight oil production is only expected to contribute 1.5m b/d of supplies by 2035, as countries such as Russia and China make limited progress towards unlocking their shale reserves.

That will leave the market once more dependent on crude from the Opec oil cartel, of which Gulf producers are key members.

Saudi Arabia, the United Arab Emirates and Kuwait have already been producing at record levels this year, to make up for shortfalls from other Opec members from Libya to Nigeria.

But the IEA expects domestic demand in the Middle East to hit 10m b/d by 2035 – equal to China’s current consumption – thanks to subsidies for petrol and electricity, even as foreign demand for Gulf oil increases.

Mr Birol said the Gulf states needed to invest significantly now to meet rising demand after 2020, because projects take several years to begin producing. But he said he was concerned Gulf countries were misinterpreting the impact of rising US shale production.

“When you look at projects in the Middle East, I do not see a great deal of appetite,” Mr Birol said.

Gulf producers have taken a cautious approach to investment in recent years, in the face of fast growing US output.

Saudi Arabia aims to maintain spare production capacity of 2.5m b/d, and it has invested heavily to begin production from the giant offshore Manifa field this year. But the world’s largest crude exporter expects to offset this by throttling back on production from other mature fields.

Overall Saudi Arabia does not plan to increase its oil production capacity in the next 30 years, as new sources of supply, from US shale to Canadian oil sands, fill the demand gap.

The UAE is reported to have pushed back its target for raising production capacity to 3.5m b/d from 2017 to 2020, while Kuwait is struggling to overcome rapid decline rates from its existing fields.

Tuesday’s report from the IEA also said India would replace China as the primary motor of oil demand growth after 2020.

Mr Birol also said he expected regional differences in natural gas prices to remain. Cheap shale gas in the US is encouraging energy-intensive industries to relocate there, and the IEA forecast that the EU and Japan would lose a third of their share of exports of energy intensive goods.

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