The International Energy Agency (IEA) is cautioning of “damaging price spikes in the 2020s” if the current weak investment in new oil supply is “left unchecked”.

The agency states that the average level of new conventional crude oil project approvals over the last three years is only half the amount necessary to balance the market out to 2025.

This supply crunch warning is contained in the agency’s flagship World Energy Outlook 2018 publication, released on Tuesday. The report states that investment in new conventional upstream oil projects is well below what would be required to meet demand in the New Policies Scenario, which represents the agency’s main scenario in three scenarios in the publication.

Under the scenario, global oil demand grows by around one-million barrels a day (mb/d) on average each year to 2025, following which average yearly demand growth is forecast to slow to around 0.25 mb/d. In addition, global demand does not peak before 2040, with all of the growth occurring in developing economies. Demand in advanced economies drops by over 0.4 mb/d on average each year to 2040.

The IEA’s Tim Gould says that, although oil use for cars peaks in the mid-2020s, this will be more than offset by rising demand for oil in road freight, aviation, shipping and, increasingly, for petrochemicals.

Gould says the need for investment is not dictated primarily by demand growth, but rather to compensate for declines from existing fields. In the absence of a rise in investment volatility threatens to become the “name of the game” in the 2020s.

The flow of new upstream projects, the IEA argues, appears geared to the possibility of an imminent slowdown in fossil fuel demand, but it could well lead to a shortfall in supply and a further escalation in prices.

“This divergence in trends between strong consumption growth and weak investment in new supply, if left unchecked, points to damaging price spikes in the 2020s.”

On the supply side, the US is forecast by the IEA to provide nearly 75% of the increase in global oil production to 2025, with tight oil production reaching 9.2 mb/d in the mid-2020s before declining slowly.

However, the level of conventional crude oil resources approved for development in recent years is far below the level needed to meet demand growth in the New Policies Scenario.

The documents states that, if approvals fail to pick up sharply from today’s levels, US tight oil production would need to grow to over 15 mb/d by 2025 to satisfy demand.

“The question we are asking is: can the US, and US shale in particular step up?” Gould says, noting that the agency is already incorporating a doubling in US tight oil from today to 2025. However, it would need to more than triple in order to offset a continued absence of new conventional projects.

“In other words, the US alone would need to add the equivalent of another Russia to global supply by 2025. We don’t rule that out . . . however it would require a level of capital investment that would far surpass previous peaks.”