Oil prices to breach $200 in ‘supply crunch’

Oil prices may currently be edging down from record highs of $147 per barrel, but think-tank Chatham House – the Royal Institute of International Affairs – is warning of an impending ‘oil supply crunch’ that will cause prices to spike higher.

Report author Professor Paul Stevens, a Senior Research Fellow at the Institute and Emeritus Professor at Dundee University, argues that a combination of sustained underinvestment – from the 1990s to the present – and rising demand will lead to a spike in prices to $200 per barrel or more within the next decade.

“Unless there is a collapse in oil demand some time within the next five to ten years, the world will experience a serious oil ‘supply crunch’,” he writes. Stevens defines a supply crunch as a situation in which “excess capacity falls to low levels and there is some form of crude ‘outage’ which leads to physical shortage and triggers a price spike.”

Stevens sees parallels with the oil crises of the 1970s, including subsidies in many countries – especially India and China, where demand is growing most strongly – shielding consumers from price rises that may encourage a change in behaviour.

However, on the supply side, Stevens criticises the major international oil companies (IOCs) for the ‘value based’ financial management strategies that have seen them return funds to shareholders instead of investing in oil exploration and production. National oil companies (NOCs), meanwhile, have little incentive to maximise production, he claims.

IOCs are hampered by shortages in both skilled manpower and the service industries that supply them. NOCs are regarded as high cost and inefficient, often starved of funds, while the resurgence in resource nationalism has led to the exclusion of IOCs from helping the national oil companies to develop their capacity.

Rising domestic oil consumption in many producer states (due to a combination of rising oil wealth and controlled, below-market prices) also means less oil for export. “To avoid a crunch, energy policy needs to reduce the demand growth of liquid fuels, to increase the supply of conventional liquids or to increase the supply of unconventional liquids,” writes Stevens.

For the full report, please visit: http://www.chathamhouse.org.uk/publications/papers/view/-/id/652/