Fears of oil crunch recede as recession knocks down global demand

IEA demand forecasts slashed by more than 3 million barrels per day

The silver lining in the dark cloud of global recession is a check to the looming oil supply crunch and accompanying price spike, says the International Energy Agency (IEA).

The organisation's medium-term oil market report, published yesterday, slashed its forecasts and predicted that worldwide demand would grow by just 0.6 per cent – or an additional 540,000 barrels per day (bpd) on average – from 2008 to 2014. In a forecast more than 3 million bpd lower than last December's estimates, total consumption will rise from 85.8 million bpd to 89 million bpd, the IEA says. Nobuo Tanaka, the IEA's executive director, said: "The global financial crisis has turned the economic landscape upside-down, with huge implications for the oil sector."

Even the newly downbeat projections may prove optimistic. Given the scale of the recent economic crisis, and grave difficulties predicting the shape and timing of any recovery, the IEA is looking at medium-term forecasts based on two different scenarios.

One, which produces the revised numbers above, uses the International Monetary Fund economic growth projections of a return to global GDP growth of near 5 per cent annually from 2012. The other takes a gloomier view, expecting growth of just 3 per cent per year, and predicting a contraction of oil demand to just 84.9 million bpd by 2014 as a result.

The good news is that lower demand means that a repeat of last year's sky-high oil prices is less likely in the short term. The key indicator is the "cushion" of extra capacity in supply from the Opec cartel of 13 oil-producing countries, led by Saudi Arabia. If the surplus is thin, it takes only a small increase in demand, or interruption in supply, to cause a major price spike. Last year, Opec's surplus ran as low as 3.1 per cent of global demand, helping prices to rocket to an unprecedented $147 per barrel over concerns about availability.

Under the IEA's more optimistic scenario, the surplus is expected to be between 7 and 8 per cent of global demand until 2012, when it dips back down to 5.4 per cent – and likely ushers in a return to volatile prices. But in the gloomier economic picture, the cushion will stay above 7 per cent throughout the period to 2014, avoiding any shortage problems.

Mr Tanaka said: "Whether we end up facing a supply crunch again by mid-decade, or with a more comfortable buffer of supply flexibility, depends largely on the pace of economic recovery and government action on efficiency."

The recession is also being felt on the supply side. Although capacity is still set to grow by an average of 4 million bpd in the five years to 2014, the forecast is a 1.5 million bpd reduction from last year's estimates. Performance is patchy. The majority of the growth will be from the 13 Opec countries, whereas non-Opec supply levels off at around 51 million bpd as falling prices hit investment and high-cost projects are put on hold.

Industry-wide upstream capital expenditure is expected to come in 20 per cent lower this year than last. And although part of the fall is down to cost reductions of up to 15 per cent, about 2 million bpd of new capacity has been deferred indefinitely since last autumn and another 4 million bpd faces delays of 18 months or more.