Expert raises spectre of next oil shock

Supply crunch feared on lack of investment

By Shaun Polczer, Calgary HeraldApril 7, 2009 7:47

For the past decade oil market analysts have been worried about "demand destruction" -- the point where high prices prompt consumers to irreversibly change consumption patterns by driving less or buying fuel-efficient cars. But in light of the recession and financial crisis, the new buzzword is "supply destruction"-- where the failure of oil companies to invest in new production inevitably leads to the next crippling oil shock and even higher prices, an energy conference in Calgary heard Monday.Photograph by: Herald Archive, Getty ImagesFor the past decade oil market analysts have been worried about "demand destruction" -- the point where high prices prompt consumers to irreversibly change consumption patterns by driving less or buying fuel-efficient cars.

But in light of the recession and financial crisis, the new buzzword is "supply destruction"-- where the failure of oil companies to invest in new production inevitably leads to the next crippling oil shock and even higher prices, an energy conference in Calgary heard Monday.

According to Prof. Paul Stevens, a senior research fellow with the Royal Institute of International Affairs at Chatham House in London, the inability of non-OPEC producers to invest in developing new oil reserves will inevitably lead to future supply pressures and the seeds of the next oil shock, possibly in the next five to 10 years.

"I see limited increases in oil supply because of the recession. The result of this is likely to see a price spike in the not-too-distant future," he told the Canadian Energy Research Institute. "Under those circumstances, we’re going to be headed for a supply crunch with serious implications for price."

According to Stevens, the world’s six largest oil companies pumped $54 billion US into their aging oilfields in 2005 compared with the $71 billion they returned to shareholders in the form of share buybacks and dividends.The result was record oil prices in 2008 that surged to $147 a barrel.

That in turn prompted consumers to reduce consumption. According to the Paris-based International Energy Agency, the world is on track for the first two-year demand reduction since the early 1980s.

Oil prices below$60 a barrel present serious challenges to non-OPEC oil production, especially in North America, said Jeff Kralowetz with Petroleum Argus in Houston, which publishes oil market data used by the global industry to make investment decisions.On Monday they fell $1.46 to close at $51.05 a barrel.

Speaking at an oil conference in Paris last week, Total CEO Christophe de Margerie said oilsands projects in Alberta need $80 a barrel to justify new investments.

Low prices have prompted project delays and cancellations around the world, but especially in Canada, where oilsands developers have shelved or postponed a growing list of major new projects, including the Fort Hills mine, the Athabasca Oil Sands Project and others.

On Monday, Paris-based Total said it will postpone a decision on the $10-billion Joslyn mine. The project was originally expected to come on-stream in 2010,but that has been pushed back to 2014.

Outside countries like Brazil, Canada is one of the few non-OPEC countries expected to post big gains in output.

"We know Canada’s going to rise, but we don’t know how fast or how soon,"Kralowetz said.

Last week the U. S. government’s Energy Information Administration (EIA) said in its annual energy outlook that the near-term future of energy markets is tied to the length and depth of the current recession.

"The recovery of the world’s financial markets is especially important for the energy sup-ply outlook, because the capital-intensive nature of most large energy projects makes access to financing a critical necessity."

But Peter Hall, the vice-president and chief economist for Export Development Canada, said he doesn’t see a meaningful recovery in the global economy for at least a year or longer, and in fact could get worse.

"To get any serious growth, I think we’re looking at the second half of 2011 before we see a return to growth."

spolczer@theherald.canwest.com