In its latest Oil Market Report, the International Energy Agency warned that OPEC’s spare production capacity is dwindling. It said this spare capacity could shrink from some 9 million bpd to less than 4 million bpd next year. It also said this meant more investments in new oil production were necessary.

On the face of it, the warning makes perfect sense but only if this face is all you’ve ever seen. Because put into the context of previous reports by the International Energy Agency, this warning is more than just an unnecessary justification for the existence of the agency. It raises a big question about the IEA credibility as a reputable source of information on energy markets and future trends in demand and supply.

According to its own website, the International Energy Agency was set up in response to the 1973 oil crisis as a mechanism to ensure oil supply security for its members. During the years, the IEA transformed into a policy advisory body for a growing number of members and one of the most closely followed enеrgy market forecasters in the world.

This is what the IEA said in its October Oil Market Report:

With OPEC+ currently on track to pump 700 kb/d below the call for its crude during 4Q21, inventories will continue to decline. As the bloc ramps up production, its spare capacity will dwindle. Compared with a cushion of 9 mb/d in 1Q21, effective spare capacity could fall below 4 mb/d by 2Q22 and be concentrated in only a few Middle Eastern countries, although supply is expected to exceed demand. Shrinking global spare capacity underscores the need for increased investments to meet demand further down the road.

And this is what the same agency said in May its inaugural Net Zero by 2050 Roadmap:

Beyond projects already committed as of 2021, there are no new oil and gas fields approved for development in our pathway, and no new coal mines or mine extensions are required. The unwavering policy focus on climate change in the net zero pathway results in a sharp decline in fossil fuel demand, meaning that the focus for oil and gas producers switches entirely to output – and emissions reductions – from the operation of existing assets. Unabated coal demand declines by 98% to just less than 1% of total energy use in 2050. Gas demand declines by 55% to 1 750 billion cubic metres and oil declines by 75% to 24 million barrels per day (mb/d), from around 90 mb/d in 2020.

In other words, in May this year, the IEA forecast that under its net-zero scenario, oil demand destruction will be so substantial there was no need for new investments as of 2021. Five months later, the same agency called on OPEC to invest in more oil production capacity because demand was, apparently, not going anywhere this fast.

Of course, it must be noted that the net-zero roadmap is not the same sort of a forecast as the monthly oil report. It is more of a best-case scenario developed by the IEA, which begins by slamming governments for falling short in their net-zero commitments of what actually needs to be done to have a net-zero human civilisation in 2050.

That best-case scenario also contains claims that the route to net zero that the IEA has developed will not just reduce oil, gas, and coal demand. It would also, according to the agency, create more new jobs and ensure access to energy for those more than a billion people who currently lack it. In short, it offers a version of the “good, cheap and fast” myth.

Needless to say, the roadmap caused a stir in OPEC+ circles although the stir was more a result of laughter-caused spasms than any worry. In fact, since the roadmap stated that the share of OPEC oil in global supply will only rise thanks to the energy transition that the IEA insists on putting in the plural, there must have been some genuine rejoicing in those circles, too.

Saudi Arabia’s oil minister Abdulaziz bin Salman called the roadmap a “la-la-land” scenario. Russia’s former top energy man, now deputy PM, Alexander Novak, said “the price for oil will go to, what, $200? Gas prices will skyrocket.”

Again, the roadmap is more of a prescriptive text than a genuine forecast. As such, it is a lot more uncertain. Yet as a stalwart champion of energy transition, the IEA should be an institution with the expertise to devise a plausible scenario for that transition. As the energy market developments from the last five months suggest, this has not been the case.

The October OMR was not the first monthly report in which the IEA called on OPEC to increase oil production. The agency also did it in June, warning of supply deficit in 2022 that required an additional 1.4 million bpd from OPEC+. That call had a much more muted tone, however, more of a business-as-usual observation than an actual call.

World oil supply is expected to grow at a faster rate in 2022, with the US driving gains of 1.6 mb/d from producers outside the OPEC+ alliance. That leaves room for OPEC+ to boost crude oil production by 1.4 mb/d above its July 2021-March 2022 target to meet demand growth, the IEA said in its June OMR.

In the October report, the tone is more urgent, as it should be, given the circumstances. Since May, when the Net-Zero Roadmap came out, Brent crude has gained more than $10 per barrel, to trade over $85 for the first time in years, and WTI is not far behind it. Natural gas is skyrocketing. So is coal, a commodity to whose complete phase-put the IEA has dedicated a release today.

The situation smacks of something like a parallel reality inhabited by IEA officials and Brussels bureaucrats, along with the Biden administration, which came into power with a pledge to set the United States on the course to net zero and just six months later pleaded with OPEC to pump more oil.

The parallel reality that the IEA, Brussels and Washington inhabit is one where everything will be electrified in the future, wind parks and solar farms will supply most of the energy with some nuclear for diversity’s sake and lots of energy storage to make weather-dependent renewables more reliable. There’s also a lot of hydrogen in that future reality.

Meanwhile, in the actual reality most of us see that energy demand is growing and it could not care less where the supply will come from. Renewables in Europe and Asia — think China — are failing to meet this growing demand and fossil fuel prices are skyrocketing as a natural consequence of demand outstripping supply.

Natural gas demand is set to rebound strongly in 2021 and will keep rising further if governments do not implement strong policies to move the world onto a path towards net-zero emissions by mid-century, the IEA said in its July Gas Market Report.

Rising gas demand, therefore, is a problem that needs to be dealt with. Indeed, gas price trends from the past couple of months suggest that a cheaper alternative would have been nice. The problem is finding an alternative that does not depend on the weather and is cost-comparable to gas. Also, apparently, it must not be nuclear although the IEA has stated nuclear will be instrumental during the energy transition.

In its latest flagship World Energy Outlook report, the IEA said the world needs $4 trillion in annual investments by 2030 in order to meet the Paris Agreement target of limiting rising global temperatures to 1.5 degrees Celsius from pre-industrial era times. Most of the money, the agency said, at some 70%, would go towards helping emerging economies get on the green track.

In the meantime, in the real world, emerging — and developed — economies are buying as much coal, oil and gas as they can to secure their energy supply during the winter. In the latest yet example of the parallel reality the IEA lives in, its head Fatih Birol said last month that the energy crunch in Europe must not be blamed on renewables even though lower wind speeds were acknowledged as the reason for lower electricity output in parts of Europe, notably the UK, which prompted higher fossil fuel demand.

This is how you can easily lose credibility in just two steps. Step one involves painting a politically correct although unrealistic picture of the energy sector and defending this picture at any cost even in the face of overwhelming evidence it is, in fact, unrealistic.

Step two is where reality interferes with the pretty picture and forces you to acknowledge it in a blunt, guilt-free way even as you try to keep the pretty picture from step one center stage. In step one, you say that with a little effort soon enough we won’t need oil so we can stop investing in it. In step two, you acknowledge that we will actually need more investments in oil because we still need it in substantial quantities, emissions and all. And you do this with a straight face because energy is serious business.

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Irina Slav on energy

How to lose credibility in two simple steps