OREANDA-NEWS. The world is likely to face an oil supply crunch as early as the end of this decade if new development project approvals do not pick up sharply in 2017, according to the IEA.

Around 15bn bl of conventional crude oil resources were receiving development approval every year on average in 2000-2014. But that figure fell to about 6bn bl in 2015, the lowest level since the 1950s, and there are no signs of a rebound this year either as the lower oil price environment persists, said head of the IEA's energy supply outlook division Tim Gould. Conventional output accounts for 70pc of the world's oil production, and this output is being continuously drained by natural declines at existing fields, he said.

"There is scope to recover from one or two years of suppressed project approvals, but with the level of demand growth seen in the New Policies scenario, prolonging this into 2017 or beyond could lead to more volatile oil prices and a new boom-and-bust cycle for the industry," the IEA said in its annual World Energy Outlook (WEO). The New Policies Scenario is the energy watchdog's main scenario.

Gould said if the number of development approvals stays low next year and beyond, "an unprecedented effort will be required to make up the lost ground", and rapid oil price rises will be likely.

US tight oil could come to the rescue "in the immediate term" thanks to its ability to ramp up production quickly, but it should not be relied upon to satisfy a major supply shortage, Gould said. By the end of this decade some of the most economic sites of tight oil - the so-called "sweet spots" - start to become depleted in the IEA's main scenario, even despite assumed continued technological improvements and efficiency gains.

Tight oil is likely to surpass its previous peak in production before 2020, the IEA said. "US tight oil production in the New Policies scenario reaches a high point in the late-2020s at just over 6mn b/d" compared with 4.3 mb/d in 2015, it said.

The IEA does not see conventional oil output bouncing back to the 2008 peak of about 70mn b/d, with the production fluctuating around 65mn b/d a year between now and 2040. It means that supply growth to meet increasing oil demand comes almost exclusively from unconventional oil, including tight oil, and the production of NGLs, Gould said.

On the demand side, sectors such as power generation and building have a wide variety of alternatives available to oil. Even in the transportation sector, the IEA is projecting for the first time a fall in oil demand for passenger cars going forward, thanks to anticipated improved efficiency, the use of biofuels, and a 100-fold rise in electric cars to 150mn by 2040. But in other sectors, such as freight and aviation, efficiencies are not widespread or not easily implemented, and alternatives to oil are not easily available, Gould said.

As a result, the IEA's New Policies scenario does not envisage a peak in oil demand before 2040. Global oil consumption grows to 95.9mn b/d in 2020and 103.5mn b/d in 2040 from 92.5mn b/d last year, according to this scenario. Total liquids demand hits 107.7mn b/d in 2040 from 94.1mn b/d last year.

World oil production stands at 93.5mn b/d in 2020 and 100.5mn b/d in 2040, compared with 92.3mn b/d last year. Once processing gains from crude oil refining are taken into consideration, world oil supply stands at 95.9mn b/d in 2020 and 103.5mn b/d in 2040, compared with 94.5mn b/d in 2015.

The IEA assumes that Opec "would eventually revert to a strategy of trying to manage oil supply". "The oil price in the New Policies scenario is therefore higher than it would otherwise be if Opec members were to pursue a policy of prioritising market share," it said.

In the New Policies scenario, Opec's share of global oil production – including NGLs – is unchanged at 42pc in 2020 compared with 2015, but gradually increases to 48pc in 2040.

The IEA says in this scenario that balancing supply and demand requires an oil price approaching $80/bl in 2020.