Many oil-importing countries, including South Africa, were breathing a little easier last week when oil markets returned to surplus on the back of an Organisation of the Petroleum Exporting Countries-led production surge.

The International Energy Agency (IEA) reported that stocks in industrialised countries had increased for four months in a row, with products back above the five-year average. The production increase came after concerted appeals by the agency, and others, for an increase in output to replace Iranian and Venezuelan supply and amid warnings that prices could rise “too high too fast”.

The IEA said rising stocks should be welcomed as a form of insurance rather than a threat. Nevertheless, as an oil price taker, South Africa should be deeply concerned about the agency’s longer-term warning of possible “damaging price spikes in the 2020s” should current weak investment levels in new oil supply be left unchecked.

This supply crunch warning is contained in the agency’s flagship World Energy Outlook 2018 publication, which states that investment in new conventional upstream oil projects is well below what would be required to meet demand in the coming few years.

The IEA sees global oil demand growing by about one-million barrels a day (mb/d) on average each year to 2025 and does not expect demand to peak before 2040, even though oil use for cars peaks in the mid-2020s. However, the need for investment is not dictated primarily by demand growth but rather by the need to compensate for declines from existing fields.

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. 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.

But, if approvals fail to pick up sharply, US tight oil production would need to grow to over 15 mb/d by 2025 to satisfy demand. In other words, the US alone would need to add the equivalent of another Russia to global supply by 2025. For South Africa, which has many energy policy balls in the air, some serious decisions are required to help mitigate the risk of possible future price spikes.

Firstly, there will probably have to be a painful acknowledgment that the fuel levy cannot be increased much further, given the economic pain that would be inflicted should oil prices spike at a time of rand weakness. Therefore, the debate about using the fuel levy to fund roads is likely to be a difficult one. Secondly, some far-sighted policy interventions are required to help mitigate the risk.

One of these should be active policy support for a more intense coupling of the power sector with those of transport and heating. This is no small challenge, as it will require policy coherence and cooperation across multiple sectors. If we get it right, though, the economic and social spin-offs would be material.