Big Crisis for the Energy Industry?
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Oil markets are confronting a great decline – for a number of reasons – and carry on to stream further down. At present, costs are already in the vicinity of $50 a barrel. Rather than seeking a cap, crude oil markets now appear looking for a floor – somewhere – at decent levels. What a transition indeed. And indeed this transformation is not without ramifications, of considerable magnitude, one can easily deduce.
Crude markets have entered a phase where, due to low prices, the incentive to invest in the industry is getting less and less.
And if the course continues, as some are contending today, another round of price spiral may not be faraway. The emerging scenario may not only be disastrous for the industry, but indeed for the general worldwide energy balance too – a real cause of interest indeed. We need to wake up to the consequences now – and not later.
Global crude prices have fallen by two thirds over the past four months and it appears set to fall further – unless drastic steps are in place. Interestingly it took 40 months for oil prices to rise from $50 a barrel to almost $150 a barrel and just four months for them to crash to the current lows.
The London-based Center for Global Energy Studies (CGES) now believes that the global oil demand would contract in 2008 for the first time in a quarter of a century.
The tapering off fortunes of oil may indeed have brought smiles in some major global capitals. Many must be heaving a sigh of relief at the turn of events.
Yet, these are not the best of times for the industry. Energy is indeed a high-priced affair. In order to keep wheeling this crude-driven civilization of ours, investments in the industry is a must. And with falling prices, this investment is now in doubt. Would there be enough investments to keep meeting the growing global requirements, is a billion dollar question.
Early cautionary shots are already there – investments in the industry are getting shy. With the global energy demands continuing to grow – albeit at a slower pace than before – the issue of meeting the future global needs is a real one. From where the incremental supplies would come, in case investments in the sector continue to be bogged down – due to the lack of incentives?
Platts, the energy information supplier, had also projected last year that companies that produce, refine and transport oil and natural gas will need as much as $21.4 trillion in capital expenditures through 2030 to meet the world’s growing energy demands.
In its recently released World Energy Outlook, the OECD energy watchdog IEA underlines that more than a trillion dollars in annual investments is needed to find new fossil fuels over the next two decades to avoid the impending energy crisis that could easily choke the global economy.
At a time when leading oil companies are backing away investments in view of one of the most severe economic downswings in a generation, and lack of incentive to invest in the sector, the IEA stressed that it’s vital for continued investment in new projects. The total potential tab through 2030 as per the IEA is to the order of $26.3 trillion – colossal by any means.
“There remains a real risk that underinvestment will cause an oil supply crunch” by 2015 as the decline in yield from mature oilfields speeds up, the Paris-based adviser to 28 oil-consuming nations said in its annual report. “The current financial crisis is not expected to affect long-term investment, but could lead to delays in bringing current projects to completion.”
OPEC has also warned that crucial downstream investment – in refining and distribution – will be curtailed if the oil price is not maintained at a reasonable level.
The crisis is beginning to unfold. The dominating doubt is already prompting companies to withhold billions of dollars of investment in new oilfield and refining projects. Royal Dutch Shell PLC, Europe’s largest oil company, said last month it was pushing back a decision on expanding an oil sands project in Canada. North American refining giant Valero Energy Corp. has also announced curtailing capital spending for the rest of 2008 and 2009. Also, Marathon Oil Co. said it has delayed expansion of a gasoline refinery in Detroit “due to current market conditions.”
“It is clear that collapsing oil prices are not only detrimental to the economies of oil-producing states, but also to future upstream investments to sustain future oil demand consumption,” Vienna-based consultant JBC Energy said in a recent market report.
Demand for oil and crude prices may be falling with the economic slowdown, but that could well lead to a supply-side crunch in the next year or so, and that will push oil prices higher again.
And that is the big challenge. The industry needs to be prepared for tomorrow, even in these uncertain times. If we do not act now, another round of price spiral may not be far off.
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