IEA Director Needs More Than Two Hands for Analysis

Nobuo Tanaka, executive director of the International Energy Agency (IEA), was interviewed by the Financial Times (FT) yesterday and said that oil importing countries were receiving a $1 trillion tax break by lower oil prices.  He said that the IEA's analysis showed that if oil prices stay at around $40 a barrel for the balance of this year, the presumed $1 trillion in savings for oil importing countries would help contribute to their economic recovery, which is good in the long term for oil exporting countries.

On the other hand, the $40 a barrel oil price means that OPEC's members would receive only about $400 billion selling oil oversears, the lowest it has earned since 2004. It would also be less than half the estimated $970 billion it received last year.  Importantly, OPEC's revenues per capita would drop from $2,288 to only $1,090.  This comes at a time when OPEC countries have ramped up their spending to develop and diversify their economies and raise the living standards of their citizens.  In fact, according to Petroleum Finance Corporation, virtually every OPEC producer needs an oil price of at least $40, and most substantially more than that to breakeven on their oil sales this year.  This analysis is one reason why PFC suggests that looking at the $54 a barrel it estimates is needed for breakeven by Saudi Arabia is the best indicator of where the Kingdom would be happy to see global oil prices settle out.

The other hand Mr. Tanaka needs is to balance out the problem of low oil prices has in reducing the development of new oil supplies just as the low prices stimulate energy demand.  The latest weekly Department of Energy figures for the United States shows that gasoline demand averged over the past four weeks is up 2.2% from a year ago, continuing a trend of increases begun several weeks ago in the face of worsening ecnomic figures for the nation's economy.  In October, gasoline demand was falling at a 5% rate.  Likewise, Mr. Tanaka was worried about how much global oil supply growth would be hurt and the risk it holds for another future oil price spike.  The IEA believes that already 1 million b/d have been lost to 2009's world oil supply due to investment cuts in response to low oil prices.

For the IEA, it appears the short-term benefit of economic stimulus from low oil prices is out-weighing the negative long-term supply implications.  The IEA is a political organization, given who pays its salaries, so the response is not surprising.