The New York Times reports on the downside of lower oil prices and demand: a slowdown, if not total stopping, of investment in new exploration and the development of alternatives. Saudi Arabia has halted several projects to increase production and build refineries, the article states. It quotes some oil experts saying that the price of oil could reach $30/barrel, a level that would sustain absolutely no investment in more expensive alternatives or investment in increased production. That means that when global economic recovery starts to happen, there will be a shortage in supply which in turn will lead to another skyrocketing of oil prices.
Big Oil Projects Put in Jeopardy by Fall in Prices
JAD MOUAWADFrom the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been suspended or canceled in recent weeks as companies scramble to adjust to the collapse in energy markets.
In the short run, falling oil prices are leading to welcome relief at the pump for American families ahead of the holidays, with gasoline down from its summer record of just over $4 to an average of $1.66 a gallon, and still falling.
But the project delays are likely to reduce future energy supplies — and analysts believe they may set the stage for another surge in oil prices once the global economy recovers.
Oil markets have had their sharpest-ever spikes and their steepest drops this year, all within a few months. Now, with a global recession at hand and oil consumption falling, the market’s extreme volatility is making it harder for energy executives to plan ahead. As a result, exploration spending, which had risen to a record this year, is being slashed.
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December:17:2008 - 08:12
The Middle East is the big winner from this. Production is declining in most non-OPEC oil fields. The UK’s giant North Sea oil fields, for instance, are already in decline.
The International Energy Agency’s recent report noted that the Middle East’s share of the world’s oil production will rise to 37% from 30% as a result.
However, if prices are too high, then investment in renewable energy will return and subsidies on gasoline in the developed world will be cut.
The Saudi’s, in particular, understand they must strike a balance. Today’s OPEC meeting is talking of $75 as an appropriate level. (This seems a little high to me).
If they can get the level right, the Middle East’s oil producers might just change the region’s economic future permanently.
December:17:2008 - 09:13
I think you’re exactly right.
I’m not sure that the $75/bbl target price is the right one, either. That is the figure that Saudi oil economists think represents the cost of marginal oil production, i.e., what it would take to make the bringing of new production (e.g. Canadian oil shale) on line economically feasible. It’s certainly above Saudi production costs, but still lower than what countries like Iran or Venezuela would like to see.