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Fresh energy crisis may be in the offing

No sooner has the world recovered from a deep economic downturn than it could face a set-back from surging oil prices, energy leaders warned on Wednesday, citing a sharp drop in investment in the sector.

Representatives of consumers, producers, national and international oil companies agreed at an OPEC seminar that a weaker oil price had meant delayed or cancelled projects.
"OPEC has about 150 projects. 35 are delayed," OPEC Secretary-General Abdullah al-Badri told delegates gathered in the former Austrian imperial palace.

Top world oil exporter Saudi Arabia warned of the severity of the resultant supply shortage from cancelled or delayed projects. Oil Minister Ali al-Naimi said "such a supply crunch would be catastrophic."

"The painful result would be felt sooner rather than later. It would effectively take the wheels off an already derailed economy," he added.

Analysts have estimated the disappearance of credit lines and a $100 collapse in the oil price since last July's record $147, have resulted in a 12 percent drop in energy infrastructure investment world-wide.

"My feeling is it may be even higher," Royal Dutch Shell's chief executive Jeroen van der Veer said.

He said fossil fuels were generally still competitive with oil at around $45, but more expensive projects, such as Canadian oil sands, have been put on hold and alternative energy forms such as solar and wind have become much less viable.

The International Energy Agency, which represents oil consuming nations, has forecast falling oil demand as economic output shrinks, but supply is falling just as fast and the IEA has repeatedly warned of a possible energy crunch in the future.

The agency's Executive Director Nobuo Tanaka said slowdowns and cancellations would reduce supply capacity by roughly 1.1 million barrels per day in 2009. Of this, around 700,000 bpd was from postponed OPEC projects he said.

It was too soon to tell whether this cycle of boom and bust energy investment was more marked than when prices last crashed at the end of the 1990s, he said.

But none of the producers speaking on Wednesday held out much hope for investing through the sharpest economic downturn in decades and the steepest drop in oil demand since the 1980s.

"If the price of oil remains low for too long, people will not invest. We will not invest," Nigerian Oil Minister Rilwanu Lukman told reporters.

"Why should we invest in more capacity and more reserves when we cannot produce? It doesn't make sense."

At a policy-setting meeting at its Vienna headquarters on Sunday, the Organisation of the Petroleum Exporting Countries agreed to stick to existing supply targets.

Citing the weakness of the global economy, it said it would avoid deeper curbs for now, even though inventories are high, but its ministers have repeatedly said that for long-term investment in incremental supplies a price of around $75 was needed.

While the producers and consumers assembled on Wednesday agreed there was a risk to investment with oil at roughly $45, true to past form, the two sides could not agree on what a sustainable and fair oil price was.

The International Monetary Fund's No. 2 John Lipsky told the conference he feared the world economy had yet to hit the bottom and his "best guess" was that recovery in economic output might begin some time next year.

In the mean time, lower oil prices, compared with last year's average of around $100 were providing an economic stimulus equivalent to around 1.5 percent of world GDP, Lipsky said.

"The decline in oil prices from the 2008 peak is providing an important element of support for the purchasing power of energy importing countries and economies and that's certainly helpful in the current context," he told Reuters on the sidelines of the forum.

The flipside is that the quicker the economy recovers, the sooner oil demand rises and, with it the risk of another surge in oil prices.

"If we place a low priority on preparing for the future, that lack of action can come back to haunt us through supply shortages and another round of high prices," Saudi's Naimi said. (Reuters)

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