CERA: US energy supply at 'critical juncture,' IPAA told

A worldwide "energy demand shock" has put the US at a "critical juncture" in its energy position. Intensely tight world oil supplies, constraints on US natural gas production, and ongoing geopolitical conflicts have compounded the extent of this shock.

Industry, policymakers, and end-users will be required to take concerted actions "to ensure energy security and environmentally sound economic growth," Cambridge Energy Research Associates Chairman Daniel Yergin told the Independent Petroleum Association of America June 14 at its midyear meeting in Colorado Springs, Colo.

"The risks will be different in the near term from the long term and among various energy users and regions," Yergin said. "But there's no question that the risks have gone up."

Proposed solutions

Yergin proposed, "The solution will undoubtedly involve adapting to a new worldwide supply-demand profile; globalizing the LNG industry; adjusting current market psychology; promoting international cooperation; maintaining a strong domestic industry; and more realistically appraising energy reserves, environmental goals, technological potential, and geopolitical limitations.

Yergin noted that the world's oil consumption stands to increase by more than 40% over the next 2 decades. By 2025, he said, global oil consumption could reach 115 million b/d compared with 81 million b/d today.

Price drivers

Driving today's high oil prices, Yergin explained, are population and social change, particularly in China, India, and in the Middle East. "Economic growth in China and India, as well as in the United States, is contributing to a demand shock on the oil market," he said. "China alone accounts for 40% of all the world's growth in oil consumption since 2000. The generally very good news in 2004 of what looks like the best global economic growth in a generation is creating specific pressure on energy markets."

Also, "Turmoil in the Middle East and other producing regions," Yergin said, "is adding a 'security premium' to the price of oil, a premium that is very 'event-sensitive.'" CERA currently places the security premium at $6-10/bbl.

"Russia and the Caspian countries are in a position, if they maintain their momentum, to add as many new barrels to the world market this decade as the Middle East, and West Africa is not far behind," Yergin said.

The North American natural gas industry, meanwhile, "is facing its highest sustained prices ever, reflecting a very tight market," Yergin said. "The reason is geological maturity at a time of significant growth in demand." Adding to the pressures in the gas marketplace, Yergin said, is contention over development and access.

The largest single driver of the increase in gas demand in the US, Yergin noted, is the new fleet of gas-fired electric power plants. "Gas consumed in the [US] power sector is set to grow 5%/year over the next few years, overtaking industry as the biggest consumer of gas in North America," he said.

LNG also will play a much larger role in the US market in the coming years, Yergin said. "It's not an either-or question. Both substantial new North American production and supplies from the world market, via LNG, will be necessary to relieve the pressures in the market."

CERA expects LNG to emerge as the second largest global energy business "with construction of as much capacity in the next 8 years as the global LNG industry has built in the past 40."

Yergin concluded, "Success in this drive will require orchestration of a wide-ranging set of independently driven factors, including development of very large liquefaction facilities; ordering and deployment of a sufficient number of tankers for reliable, timely transport; and construction of regasification facilities."