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Tue 17 Feb 2015 12:19 PM

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IEA's Birol says Middle East militancy poses "major challenge" for oil

The appetite for investments in the Middle East is close to zero, top economist says

IEA's Birol says Middle East militancy poses "major challenge" for oil
Fatih Birol, Chief Economist of the International Energy Agency. (Getty Images)

The rise of the ISIL in Iraq and Syria
presents a major challenge for the investment necessary to prevent an oil
shortage in the next decade, the International Energy Agency's (IEA's) top
economist said on Tuesday.

While the IEA has sounded warnings that Middle East
crude production will need to rise in the 2020s to meet predicted demand, chief
economist Fatih Birol said there remain "myopic" views about the need
for investment at a time when the fall in oil prices means energy companies are
slashing new drilling.

US oil output from shale formations, while expected
to rise in the short term even with the cutbacks in drilling and investment,
will not be enough to meet demand. The traditional Middle East producers will
need to meet the expected rise in consumption, Birol said, with Iraq expected
to contribute about 50 percent of the additional oil needed.

That means "we now have a problem," Birol
said, speaking to Japan's gas industry association four days after the IEA
confirmed his appointment to replace Maria van der Hoeven as executive director
when her term expires at the end of August.

"The security problems caused by Daesh (ISIL)
and others are creating a major challenge for the new investments in the Middle
East and if those investments are not made today we will not see that badly
needed production growth around the 2020s," Birol said.

"The appetite for investments in the Middle
East is close to zero, mainly as a result of the unpredictability of the
region," he said.

ISIL extremists have disrupted oil production in
northern Iraq, although output in the south - where most of the country's crude
comes from - has so far been largely unaffected.

Still, attacks by Islamist groups with suspected
ties to IS are spreading, including to an oilfield in Libya in which France's
Total has a stake.

Oil prices have rallied to around $62 a barrel from
a six-year trough below $46 in mid-January, mostly on worries about falling rig
counts in the United States and the outlook for future shale oil production.

Still, US crude inventories have continued to swell
because of production already in place, with the stocks rising to a record high
of nearly 418 million barrels in the week to Feb. 6, government data showed
last week.

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