Are We Laying the Groundwork for Another Oil Crisis?

Despite the environmental concerns and energy security issues, oil will continue to play a critical and central role in our energy portfolio through the transition to a clean energy economy and beyond. At the same time, let’s not forget, that oil is an important industrial feedstock with over 20% of production going into products such as plastics and fertilizer. (IEA 2008). Thus, it important to continue to invest in oil exploration and production to maintain future supplies. The concern is this is not happening.

The financial crisis has reduced demand for oil and depressed prices to as low as $30/bbl at the turn of the year। Some analysts, Veronique Lashinski of Newedge, being the leading proponent, believes that oil demand peaked in the U.S. in 2007 and will remain depressed through out the economic recovery and beyond. Peter Jackson of IHS Cambridge Energy Research Associates, cites global oil demand reached an “undulating plateau” in 2005 which will continue our to at least 2025-2030. While, Mark Cooper, a research fellow and energy expert at the Vermont Law Schoo states, "This might be an “inflection point” in the American economy." Thus, one might conclude that there is no eminent crisis.

At the same time, signs of a coming crisis are recently highlighted by IEA warnings: oil & gas investment budgets were slashed by over 20% in 2009 taking over $100B out of the new investment cycle. This follows a similar trend n 2008 where over $170B (20 planned projects) were canceled or postponed indefinitely. While OPEC in helping this situation by constraining production and driving prices higher, the concerns are based on historical precedent. Economic recoveries tend to spur sharp upticks in energy/oil demand and while speculative markets drive sharp spikes on pricing based on short term constrained supply and longer term delays discovery/production. The IEA and others foresee a potential oil crisis looming on the horizon in 2012-2014 (depending on economic recovery and growth rates) with demand outpacing production capacity and prices easily exceeding last year’s historic level of $147/bbl. While these high oil prices will spur investments in renewables, they drive up CPI for all and siphon capital away from investments.

Developing a diversified energy portfolio and investing in clean & renewable sources is essential to energy security and sustainable, long-term economic growth. At the same time, we need to continue to invest in oil (as well as natural gas for base/peak load generating and heating) as part of a coherent and comprehensive energy strategy.

Today the creation of this strategy is hampered by great uncertainties, uncertainties that weaken commitment and postpone needed investment. To move forward, cap & trade agreements (the currently preferred solution) will help to establish a markets for carbon credits that will produce pricing signals that will clarify the economics of the energy/environment trade-off and create of capital flows. The COP15 agreement will establish the second critical element; a framework for establishing quotas and managing the flow of funds.