IEA: The World Is Totally Unprepared For When The Great American Shale Boom Fizzles

The International Energy Agency says world markets are unprepared for when - and it's a when, not if, it asserts, - the Great American Shale Boom fizzles, The FT's Ajay Makan and Neil Hume report.

In its latest World Energy Outlook released this morning, the IEA forecasts unconventional oil production will require $700 billion annually - basically about where we are now - to sustain current output levels. Even if the industry is able to do so, production will begin to slip in a decade regardless because of shale wells' high decline rates.

At that point lower-cost Middle East production will have to take over again. But those countries haven't been making the necessary investments to prepare for this outcome, the agency warns, meaning the rest of the world will be caught flat-footed.

FT:

"...key Gulf producers have been adopting a 'wait and see approach' to investment, because of the perception that the US shale revolution would produce an 'abundance of oil'.

" 'I am really worried that we are giving the wrong signals to the Middle East, which may end up with us not having investment in a timely manner,' IEA chief economist Fatih Birol said.

" 'The wait and see behaviour is definitely not in the interest of consumers or global oil markets because it may mean significantly higher prices in the future.' "

There remains lots of debate about how long "Saudi America" can last. The EIA just explained how drilling has actually become more efficient in many major U.S. shale plays. It also have raised estimates for recoverable shale oil both at home and abroad. Meanwhile there are lots of factors weighing on oil demand including more switching to natural gas and improving fuel efficiency.

All of which should help extend the life of shale plays.

Plus, as Reuters' John Kemp writes this morning, and as we've pointed out in our Charts That Should Terrify Saudi Arabia, the Saudis could be in trouble if shale production sprouting up in other parts of the world.

But analysts including Bernstein's Bob Brackett and MercBloc's Dan Dicker say the jig will be up sooner than later: production growth is already slowing in the U.S., while global demand will continue to climb. Here's what Brackett said this spring:

In order to maintain current levels of overall production, marginal conventional production must be maintained with high oil prices. We expect marginal cost inflation will continue as well productivity declines, resulting in an oil price forecast that differs significantly from the forward curves. We forecast $96/bbl WTI for 2013, $101/bbl WTI for 2014, and longer term prices above $120/bbl and rising after 2017.

At this point, "hope for the best but plan for the worst" might be in everyone's interest.