Crude Mathematics  

Posted by Big Gav

The Guardian has an article by Michael Meacher, noting falling oil prices are destroying investment in new supply - Crude Mathematics.

A plunging oil price means cheaper petrol now – and no fuel later as industry investment shrivels,

A snip at $48.50. Now that the price of a barrel of benchmark Brent crude continues to fall like a stone in the global recession, a drop of no less than two-thirds since the high point of $147.50 just four months ago, the relief is huge among motorists and hard-pressed consumers.

Conversely, for the oil-producing countries (especially Russia, Iran, Saudi Arabia, the UAE and Venezuela) it is potentially cataclysmic, though some, such as the US, may rejoice at that. But there is another dimension to this oil-price slide which has been little noticed, but which long-term is extremely serious.

If oil prices remain well below a certain critical level for any significant period of time, large amounts of investment in expected oil production capacity will simply be written off, and the consequence could then be a recovery-stopping supply-side crunch within little more than two years.

That critical level is widely reckoned within the oil industry to be $90 a barrel. A current price as low as half that critical level is already forcing many companies to drop oil projects, and the banking crisis is also squeezing project financing for foreign oil companies operating in OPEC and outside.

Russia's four major energy companies – Gazprom, LUKoil, Rosneft, and TNK-BP – depend heavily on debt to finance operations, and are scaling down their investments. They have already been forced to seek an allocation of more credit to refinance their external debts. But with Russia now facing a $150bn shortfall in its spending plans for 2009 and where Russian markets have lost 70% of their value in just six months since May, it is all too likely they will be forced to slash their investments further.

The consequences of this for the EU and the UK are very serious. Since the EU gets 40% of its gas from Russia, where 70% of the gas fields are already in decline, any further major cutting-back in future oil and gas investments could act as a pincer on EU and UK energy supply. Indeed, the Russian energy industry has warned that if the decline continues, Russia may not be able to service even its own domestic gas needs by 2010 – this from a country where Gazprom is the largest extractor of gas in the world.

A prolonged slump in the oil price at below $50 a barrel will thus inevitably lead to another cycle of shortages and soaring prices. This intense price volatility is the first stage of the devil's see-saw that is likely to accompany the coming of Peak Oil, which is widely expected within the next five years.

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