IEA asks OPEC to narrow the supplies / quotas gap, the agency created

*Faisal Faeq

@FAISALFAEQ

Ironically, the International Energy Agency (IEA) said that “there is a significant difference between the targets that OPEC producers set in terms of their production levels (quotas) and what is produced today. IEA also hopes that OPEC producers can close the gap between their words and actions and hopefully provide more barrels to the market.

If there is any gap between the supplies and quotas, or the supply and demand, then this gap is made by the IEA and its contradicting statements and its misleading outlooks that will adversely impact the future of global oil supplies and refineries.

IEA is supposed to provide impartial analysis and pragmatic outlooks of energy supply and demand trends and what they mean for global energy security and economic development in the interests of consumers that would also help decision-makers in energy policies and investments.

Since the beginning of OPEC+ collaborative efforts in early 2017, and simultaneously to the signs of market equilibrium, IEA started promoting theories that support the supply glut and reduce the growth of global oil demand to undermine OPEC+ efforts to balance the market, after suggesting that the return to balance is delayed.

IEA has tried desperately to put various outlooks that contradicted its predecessors, in terms of a slowdown in demand with the increase in energy efficiency programs and the transformation of the transportation sector to reduce dependence on oil derivatives, which was supposed to reduce transportation fuel consumption relatively. Still, the agency ignored the steady growth in demand from commercial transportation.

IEA has exacerbated the impact of the pandemic on upstream and downstream activities after the unprecedented losses incurred to international oil companies and refineries. The IEA has capitalized on these losses and called to stop financing fossil fuel projects. In contrast, the oil industry needs enormous capital flows for upstream investments to meet the unexpected speedy recovery in demand after the pandemic.

IEA’s demonization of oil and its low estimates of demand and prices has extensively damaged upstream and downstream investments and will affect future oil supplies, especially with the agency’s roadmap for net-zero carbon emissions in 2050 and its calls for an immediate halt to upstream investments in oil and gas.

The pandemic has put significant downward pressure on the global oil refining industry amid a substantial drop in demand for refined products, leading to the most significant global refining capacity decline in 30 years in 2020 and 2021. The return of oil demand in the second half of 2021 relieved much of that pressure, but investors rushed to compensate for the pandemic losses rather than inject capital investments.

IEA has acknowledged that the global refining capacity has been affected by the closures and high energy costs, which led to a decrease in global refineries rates since mid-2020 by about 3.6 million barrels per day (bpd) of refinery closures since the beginning of the pandemic, which may be compensated by the expected increase of about 3 to 3.7 million bpd of new refining capabilities until 2025 from new refineries, especially with refineries averaging 76 million bpd in 2020 and 79 million bpd in 2021 below pre-pandemic levels. IEA also has recognized that to increase average global refinery operating rates to return to sustainable levels above 80%, an additional 6 million bpd of global refining capacity is needed.

Didn’t the IEA contribute to these global refining closures when illustrated in its medium-term oil report in 2021 that the large-scale refinery expansions and expectations of a long-term structural decline in consumption have created a refining capacity overhang that can only be resolved by massive closures?

The IEA exploit the ongoing fights against fossil fuels to affect decision-makers not only from the climatic aspect but also from the economic aspect. IEA has sent many signals to discourage investing oil industry without considering the enormous impact of upstream oil investments on oil supplies and the investors themselves.

The Energy Information Administration (EIA) has reported a 4.5% closure of the United States refining capacity to a total of 18.1 million bpd since the start of 2021. The number of US refineries went down to 129 refineries, down from 135 operable refineries listed at the beginning of 2020 that, largely reflect the impact of responses to COVID-19 on the US refining sector.

The underinvestment in oil upstream and downstream projects might lead to a catastrophic shortage in oil supplies petroleum refined products in the medium-term as supply might not keep up with demand growth amid the economic growth and the demographics developments. So far, much of the produced oil has not compensated for the decrease in oil investment.

The massively depressed Capex spending will lead to the fact that supplies might not keep up with the fast demand rebound that is risen much faster than the consensus has assumed. When consensus shifts on the demand side, it won’t take long for investors to connect with a constrained supply side. Global spare capacity is limited, which will explode oil prices while definitely, oil is irreplaceable. Refineries closures will also send petroleum refined products prices skyrocketing.

It will be interesting to see enormous funds for the newly built refineries. It will also be interesting to see how the global refining capacity will respond to the upcoming high gasoline demand season this summer.

Did the IEA’s questionable outlook and calls to stop fossil fuels funding contribute to the global refining closures and any upcoming oil supplies shortage?

After all these contradictions and fallacies from the IEA, is it reasonable for producers, consumers, decision-makers and investors to base their policies for the future of energy on the Agency’s expectations, and is it conceivable that the local and regional media continue to circulate and convey its studies while the IEA tries tirelessly to impose their agendas on the energy balance and the global economy and negatively affect the main players after it lost its credibility a long time ago?

*Energy Adviser (former OPEC and Saudi Aramco)