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Credit Crunch Will Lead to Oil Shock: Consultant
ENERGY, NORTH AMERICA, MIDDLE EAST, OIL, RECESSION, ARAMCO, IEA, INTERNATIONAL ENERGY AGENCY, OPEC
Reuters | 26 Mar 2009 | 07:13 AM ET
The global financial crisis and collapse in the oil market have stalled vital investment in oil exploration and production and are likely soon to lead to a sharp spike in prices, an energy consultant and financier says.


Matt Simmons, founder of Houston-based investment bank Simmons & Co, argues the underlying rate of decline of the world's ageing oilfields is as much as 20 percent a year and only high levels of investment can reduce that to single digits.

With credit tight and oil prices almost $100 a barrel below their highs last year, oil companies are unable to sustain previous levels of spending and the result is falling production, he said in an interview on Thursday.

"We are three, six, maybe nine months away from a price shock. We are not talking about three to five years away -- it will be much sooner," Simmons told Reuters in London.

"These prices now are dangerously low. The lower prices fall, the less oil will be produced and the greater the chance of an oil spike," he said.


Oil prices hit record highs of almost $150 per barrel last July but have tumbled since then as the global economic downturn has cut energy consumption by consumers and companies alike.

Prices have rallied from lows below $35 a barrel in December to above $50 but remain well below what many oil companies and producing countries say they need to invest in new production.

Simmons is a proponent of the "peak oil" theory, and has argued for years that world oil output is in irreversible decline because oil industry infrastructure is getting too old.

He says the cost of rebuilding the oil industry is colossal: "The industry's asset base is beyond its original design life."

Twilight in the Desert

Simmons' 2005 best-seller "Twilight in the Desert, The Coming Saudi Oil Shock and the World Economy," argued oil output from the Middle East's biggest supplier was reaching an apex and would soon decline, ending forever the era of cheap oil.

Saudi Arabian oil company Aramco and many other analysts strongly disagreed with that thesis, saying Simmons exaggerated the rate of decline of older oilfields.


Cambridge Energy Research Associates last year put the rate of decline of the world's oilfields at just 4-5 percent a year.

But Simmons' concerns over the impact of the credit crisis and the dramatic fall in oil prices are shared by many other, more conservative bodies, including the International Energy Agency (IEA), which advises 28 industrialized nations.

IEA Deputy Executive Director Richard Jones warned the oil market this week that so far as much as 2 million barrels per day (bpd) of new upstream capacity due to come on stream had been deferred for now due to lack of funds and low oil prices.

The IEA is also worried recent cuts in oil production by the Organization of the Petroleum Exporting Countries in an attempt to bolster prices have left oil inventories dangerously low, leaving little room for maneuver when oil demand recovers.

Simmons says many OPEC oil producers will find it difficult to bring output back to previous levels once prices recover.

"When you have an old oilfield whose flow is being maintained by extremely high levels of investment and you reduce production, you rarely if ever get back to where it was."

Slideshow: Which Oil Nations Make Money?
Because of this and natural declines in output, oil use may not need to rise much before production fails to meet demand.

"Unless oil demand falls by 10 or 15 percent per annum, which it is not going to do, then we don't need to wait for oil demand to come back before we have a supply crunch," he said.

"Within a few months, we are going to realize our visible inventories are really tight -- squeaky tight -- and what would really be inconvenient is to see a recovery in the economy."

Copyright 2009 Reuters. Click for restrictions.
URL: http://www.cnbc.com/id/29891917/


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