The International Energy Agency made headlines earlier this month when it declared that the boom in North American oil production "will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15." Yet it has either badly overreached or wildly understated its case. If the latter, oil prices could plunge within five years, before spiking again. OPEC's meeting today in Vienna is a first test of which way things might go.
The case for overreach is simple. The rise of China helped propel oil prices from $20 a barrel to well over $100. The IEA forecasts no change remotely similar in scope. Indeed it now anticipates higher prices than it did a year ago. Its big headline, instead, is that the bulk of oil supply growth will come from countries outside OPEC, rather than from inside the group. This is great news for the U.S. economy and for the industry. But it is hardly as revolutionary — or as far-reaching in its consequences — as the Chinese oil demand shock.
The prospect of a price crash is more remote but would be far more consequential. The IEA projects that the world will add oil production capacity at a far greater pace than global demand will grow, driven most prominently by the United States and Iraq. Growth will be so fast that, by 2014, OPEC countries will need to hold nearly 7 million barrels a day of oil off the market to balance supply with demand.