There is widespread agreement that a combination of falling investment in oil production and the ongoing OPEC production cut will eventually cause another damaging spike in oil prices. Last week Matthew Simmons told Reuters that “we are three, six, maybe nine months away from a price shock. We are not talking about three to five years away — it will be much sooner.” Other organizations share Simmons’ view that the lack of investment will lead to sharply higher prices, but generally see a price spike coming in the context of an economic rebound and increased demand for oil.
Last week the Deputy Director of the IEA, Richard Jones, told a London conference that more than 2 million b/d of new production, scheduled to come on stream over the next few years, has been delayed. Jones told the conference that “unless sufficient companies have the will and financial ability to invest through the down-cycle, there is a real risk that supply growth may lag the eventual rebound of demand, leading to substantial price increases – possibly as early as this year.”
Even Cambridge Energy Research Associates, the consummate oil production optimists, have turned more pessimistic about the prospects for further growth. Last week, CERA issued a report that cuts back projected growth in world “productive capacity” in the next five from 15 million b/d to 7.6 million b/d. CERA expects that a number of projects in the deepwater, Alberta oil sands and Orinoco heavy oil will be delayed or cancelled due to low oil prices. CERA did hedge its forecast with the caveat that if the economic recovery does not start next year as expected, there could be a “large surplus of production capacity for the next several years.”
It is not difficult to foresee a growth-threatening run-up in oil prices if the demand for oil begins to increase. The key issue is what happens to oil prices and investment in more production if the global economy continues to slip this year and next. We view such slippage as a very reasonable scenario.