Delayed energy investment disturbing
Claudia Cattaneo, Financial Post
Published: Thursday, November 13, 2008
Four months into an oil bear market that, for those associated with the energy sector, gets more challenging by the day, the International Energy Agency issued a wake-up call yesterday:
The world's energy supply crunch hasn't gone away, even though it's hard to tell from today's depressed energy prices.
Indeed, once the dust settles from the financial crisis, the Paris-based agency warned it will be even tougher to produce the energy the world needs, while dependence on Middle East supplies will keep rising.
The immediate problem is that low oil prices are discouraging badly needed investment, setting the stage for a return to high oil prices when the economy recovers.
"We see and hear about energy investments being delayed ... This is a major worry and could lead to a supply crunch and much higher oil prices than we've seen before," the IEA's chief economist, Fatih Birol, told journalists yesterday in London, where the IEA unveiled its annual world energy outlook.
While our return to higher oil prices would be good news for Canada's high-cost oil-and-gas industry, it'll be a while before anyone listens, or cares.
The market, for one, which is setting the investment agenda, is so sold on the idea the oil boom is history it may now need a supply shock to reverse course. Yesterday, traders pushed prices down even further, to US$56.16 a barrel, a 21-month low, on expectations the IEA will cut its oil demand estimate today for next year.
It's true the IEA sees enough new projects in the pipeline in the next two to three years to meet needs. But it also says seven million barrels a day of additional capacity needs to be completed by 2015, and given the time lag required to build projects, those investments would have to be launched right about now.
Instead, oil companies, particularly in Canada, are slashing budgets with a vengeance. Canada's oil-sands industry, which was expected to contribute about a third to that additional world supply by 2015, is struggling to stay afloat in the first downturn of its 10-year history.
Even if oil prices rebound by 2010, oil-sands operators that quickly shut down plans on the way down will want to be a lot more confident about a strong oil outlook before they ramp them back up. Just as important, they are quietly welcoming a break from labour shortages, cost over-runs and fights with governments, and won't easily give up.
Politicians will also dismiss the IEA's oil-supply concerns. The new buzzwords, certainly in the United States, are green energy, fewer fossil fuels and more greenhouse-gas regulation. They are worthy goals, but if they fail to alter the global oil demand picture, here's what the IEA predicts: unprecedented supply uncertainty, with OPEC increasing its share of world production to 51% in 2030, from 44% today.
And that's if OPEC makes the investment. The risk is that it won't, the IEA warns, since "the long-term policies of some major resource-rich countries in support of national goals may lead to slower depletion of their resources." Having barred international oil companies, they don't have the management skills or technology to do more than harvest existing assets.
So, enjoy low gasoline prices while they last. The bill will come later.
