Veritas – Oil to hit $212 says IEA report

The International Energy Agency is set to predict oil at $212 by 2035, according to a leaked copy of a report meant for publication next week.

The 2011 World Energy Outlook is the Agency’s key annual publication, reports Reuters, which has obtained a draft copy.

According to data in the draft, the IEA expects oil to be priced at $114 by 2015, reflecting ongoing demand against known sources of supply.

It is expected to warn that ongoing political instability, such as the Arab Spring seen earlier in 2011, will put upward pressure on the average price paid for imported crude to the IEA member states.

However, should demand grow more quickly, then the IEA price estimates jump to $119 by 2015, and $247 by 2035.

The figures will be closely watched by fund managers across Europe. Reports from Norway suggest that country’s government has already come under pressure to review its licensing system for exploration in the North Sea following ths year’s massive Aldous/Avaldsnes find by companies such as Statoil and Sweden’s Lundin Petroleum.

The size of that find has been upgraded significantly since it was officially confirmed, leading some to argue that the licences have been sold too cheap given it could become the biggest ever in Norwegian waters with a predicted 30-year-plus extraction lifetime. The implication is that the country’s sovereign wealth fund, which is tasked with handling revenues from oil and gas, has been short-changed by the current setup. The fund is managed by Norges Bank Investment Management, which ultimately answers to the country’s Parliament.

However, the IEA’s timeline puts the $200+ oil 24 years hence, just beyong the point at which the licences awarded Statoil, Lundin and others run out. Then, the coffers of the Norwegian SWF could be swelled significantly.

UK equity fund managers will also want to calculate the effect of the IEA numbers on their holdings. Shell and BP are among the biggest constituents of the FTSE 100 index of London stock market listed companies. Any faster rise in the price of oil globally mostly flows straight through to the bottom line. However, profits that grow too fast will also attract unwanted attention from so-called windfall tax proposals, which have hit the UK’s oil sector from time to time.

Oil, in the form of diesel, is also one of the biggest input costs for the mining sector, which along with the oil majors has a considerable weight in the FTSE. Where oil majors gain, the miners could lose, although calculating the balance is a difficult business given that oil and other commodities tend to be priced in dollars.

On the other hand, more expensive oil could be a benefit to those invested in renewable energy funds. The issue took on a politically explosive tone in the UK this past week with the announcement the government is to cut back the so-called feed in tariff for solar power.

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