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Rising Fear of a Future Oil Shock

Jad Mouawad, The New York Times
Friday, 27 Mar 2009 | 9:56 AM ET
Oil traders on the floor of the New York Mercantile Exchange, New York.
AP
Oil traders on the floor of the New York Mercantile Exchange, New York.

Sharp reductions in investments and low oil prices could curb future supplies by almost eight million barrels a day within the next five years, according to a study scheduled for release Friday, the latest warning that the world could face a new energy shock when the economy picks up.

The report by Cambridge Energy Research Associates, an oil consulting firm, said that the potential drop in production capacity is a “powerful and long-lasting aftershock following the oil price collapse.”

The global slowdown has forced oil companies to slash their investments, postpone or cancel expansion plans, or delay drilling in many corners of the world. While some of the biggest companies, like Exxon Mobil and Royal Dutch Shell, say they will keep their investments unchanged this year, many other producers are curbing investments because of the crisis.

The report says about 7.6 million barrels a day of future supplies are “at risk” of being deferred or canceled, like heavy oil or deepwater projects, and which could bring total supplies to 101.4 million barrels a day by 2014. Last year, the group projected that capacity would rise to 109 million barrels a day by then.

“Seven consecutive years of rising oil prices — unprecedented in the history of the oil industry — have come crashing down, thus burying the notion that the commodity price cycle was a historical relic,” said the report, a field-by-field study of production trends.

Many experts have voiced even darker concerns in recent months. Christophe de Margerie, the chief executive of French oil company Total, recently said that producers would find it challenging to bolster supplies even to 90 million barrels a day by the middle of the next decade as projects get canceled.

Oil prices have fallen by 63 percent from their peak of $147 a barrel last summer. They are now trading around $54 a barrel after OPEC producers curbed supplies to prevent a price collapse.

But even at this level, many producers warn that oil prices remain too low to sustain increased investments.

Global oil demand is headed for its second consecutive drop this year. Over time, as populations grow, most experts expect oil consumption to rebound as emerging economies become richer. Any slowdown in investments now will translate into higher prices.

This month, oil producers meeting in Vienna also warned of a possible price shock when the demand for oil picks up again in coming years. As many as 35 new projects in nations belonging to the Organization of the Petroleum Exporting Countries may be delayed by 2013.

“I have often described unsustainably low oil prices as carrying the seeds of future spikes and volatility. In a low-price environment, the trend is often to focus on survival instead of expansion,” Ali al-Naimi, the Saudi oil minister, said recently. “If we place a low priority on preparing for the future, that lack of action can come back to haunt us through supply shortages and another round of high prices.”

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The same concerns are also worrying economic experts from consuming countries, including the International Energy Agency and the International Monetary Fund.

“The lower that oil prices drop now and the longer they stay low, the greater the negative impact on future supply,” John Lipsky, the first deputy managing director of the I.M.F., told an OPEC conference in Vienna this month. “In other words, today’s low prices could be setting the stage for another price run-up in the future.”

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