Oil-Price Rebound Could Be Severe
The slump in oil prices has spread relief among consumers and fuel-reliant industries, but also is squeezing the companies who could invest in new sources of oil -- spurring concerns that prices will prompt them to shelve investments.
Industry executives warn that could mean the world will face a dramatic ramping up of prices as soon as the global economy, and demand, begins to rebound.
'Low oil prices are very dangerous for the world economy,' said Mohamed Bin Dhaen Al Hamli, the United Arab Emirates' energy minister, speaking Tuesday at an oil-industry conference in London. 'We need an adequate and reasonable oil price that will continue to stimulate investment.' With prices now languishing, he said, 'a lot of projects that are in the pipeline are going to be reassessed.'
The global economic slowdown has driven down demand for oil, pushing crude prices to levels not seen since the spring of 2007. In an attempt to stem the decline, the Organization of Petroleum Exporting Countries agreed last week to slash output by 1.5 million barrels a day -- its biggest single reduction in almost eight years.
But the move didn't stop the slide. U.S. benchmark crude for December delivery fell 49 cents on Tuesday, or 0.78%, to $62.73 on the New York Mercantile Exchange. That is down about 57% from its record high of $145.29 in July.
Nobuo Tanaka, head of the International Energy Agency, the Paris-based watchdog, was one of several experts at the annual Oil and Money conference here predicting that the industry could be setting the stage for yet another supply-and-demand whiplash down the road. 'We're concerned that supply won't catch up with demand after this crisis,' Mr. Tanaka said. 'The supply crunch may come again, but in a more acute way.'
The price of crude began its rally five years ago, when an oil industry that hadn't invested enough in new capacity during the years of low prices failed to cope with surging demand from the booming economies of China and India. That scenario could now play out all over again. 'I hope we don't go through the same cycle,' said Mr. Al Hamli.
In two years' time, 'we could see much higher prices than we saw three months ago, if the investments are not going through,' said Fatih Birol, the IEA's chief economist.
To be sure, most big oil companies have shown no sign of trimming their investments. Royal Dutch Shell PLC says it is sticking to its capital-investment target of $36 billion for this year -- the largest in its history -- and Chevron Corp. is also charging ahead with its $23 billion program.
Most of the majors' big projects are designed to break even at prices substantially lower than the current cost of crude. 'I don't think there will be major changes in investment,' said Paolo Scaroni, chief executive of Italian oil company ENI SpA. 'Maybe in unconventionals, but not conventional oil projects.' |
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