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As US motorists rejoice that the price of gasoline is now approaching an all-time, inflation-adjusted low, many thoughtful observers are bemoaning the effects on future oil production as project after project is delayed or cancelled due to low oil prices and a lack of liquidity. It is starting to dawn on many that, should oil prices and demand remain low for an extended period, new investment in oil production will fall to such an extent that, with worldwide depletion, now thought to be in the range of 5 to 6 percent a year, there simply will not be enough new oil to power an economic recovery.
Cancellations of high-cost oil sands and deep water drilling projects are most prevalent at the minute as are new multi-billion dollar refinery projects intended to process the lower grades of crude. Although the international oil companies are still making money, and seem to be continuing with the next round of projects, the national oil companies, which must turn over bulk of their revenues to support their governments, will soon be in no position to finance new production projects. The resource nationalism that has been rampant in recent years has led to troubled relations between the international oil companies and several major producers including Russia, Venezuela, Iran, and Ecuador. Last week a senior Iranian oil official said his company is going to need $14 billion a year for the next decade in order to maintain oil and gas production.
A few months ago, the major US oil companies were earning so much money that they could afford it all – stock buy-backs, raising dividends, debt buy-down, and expanding investment budgets. With oil at $55 a barrel and sales contracting, they now are forced to make choices.
Of most concern is that expensive clean and renewable energy projects are starting to go on hold as demand for energy drops and investment loans become scarce. So-called “clean coal” with carbon sequestration is extremely expensive. There are increasing calls for new energy taxes in the US, similar to those in Europe, which would bring prices back to a level where investment would be worthwhile and would foster conservation.