IEA: Oil Prices are Poised to Skyrocket Once Again

Yesterday, the Wall Street Journal covered a new International Energy Agency report that cautions that short term cutting of energy investment could lead to a big bounce back in oil prices within the next three years.  As the recession pushed the cost of oil below 60 dollars a barrel, energy companies have pulled back or put off investments totaling over 170 billion dollars.  By cutting investment, it is estimated that future oil supply will be reduced by close to two million barrels per day.

Many of the cut projects are in politically stable, non-OPEC nations like Canada.  Typically, the crude oil found within non-OPEC nations takes more time and money to develop than that found in OPEC nations.  This makes the prospect of developing these resources less attractive with present price concerns, but even more difficult to fast track upon an upturn in oil prices.

Good examples are the approximately fifteen Canadian oil sands projects that have been halted.  These projects involve an estimated 1.7 million barrels a day in production, and approximately 150 billion dollars in withdrawn investment.  Oil sands produce a less profitable form of crude oil, so crude oil prices need to be to be at a base range of 55 to 60 dollar a barrel for oil sands projects to maintain profitability.  If current oil prices were to remain stable, oil-sands projects will be able to eke out a profit, but only by a small margin.

A Canadian oil sands project (image: solarnavigator.net)

Though projects like these looked like a strong investment last year when oil was trading above the $100-a-barrel mark, they look less attractive under current market conditions.  However, analysts point to two factors that may soon lead to an oil rebound.  Alluded to above is the fact that much of the world’s easy-to-tap oil has already been discovered.  Further, emerging markets like China are raising their energy consumption at a rapid rate, creating a potential strain on future oil production.  Easing these pressures on oil production are the energy-efficiency measures that have been advanced by several governments in the developed world.  The question remains: When will the economy, and in turn demand for oil, recover?

Faith Birol, head economist at the IEA (image: daylife.com)

Though oil is currently abundant due to weak global consumption, the beginning of an economic turnaround could mark a new upsurge in oil prices.  According to IEA chief Economist Fatih Birol, “come around 2012 the impact of this big recession on oil investment and capacity, if current trends continue, could be severe with much higher oil prices.”

Due in part to data from its member countries, the IEA is considered one of the most reliable energy statisticians in the industry.