An oil shock may be lurking around the corner as the price bust has hammered investment in future supply, according to the Paris-based, International Energy Agency, IEA.
The IEA in its latest report identified the risk of supply outages such as those in Nigeria and Iraq as “episodic” events due to political instability, something that may also affect other countries around the world as a result of low oil prices.
“Historic” investment cuts taking place now increase the possibility of oil-security surprises in the “not-too-distant” future, Neil Atkinson, head of the IEA’s Oil Industry and Markets Division, said.
He explained that about $300 billion is needed to sustain the current level of production, and nations including the U.S., Canada, Brazil, and Mexico are facing difficulty in keeping up investments.
“We need a lot of investments just to stand still,” Atkinson said at the launch event of SIEW 2016.
“There’s danger as we are reaching a point where we are barely investing upstream. If investment doesn’t resume in 2017 and 2018, we can see a spike in oil prices as oil supply can’t meet demand.”
Companies such as ConocoPhillips, Chevron Corp. and BP Plc were said to have canceled more than $100 billion in investments, laid off tens of thousands of workers, slashed dividends and sold assets as oil sank below $30 a barrel to a 12-year low.
With crude rebounding since mid-February to near $41, Atkinson said the worst may be over for prices as they have a floor “for the time being.”
The Organisation of the Petroleum Exporting Countries, OPEC, and other producers including Russia plan to meet in Doha next month to discuss limiting output to reduce a global oversupply.
“The meeting may or may not take place,” said Atkinson. “It’s seen as a gesture to show that there is stability and the impact it will have on actual supply structure will be “none whatsoever,” said Atkinson, who expects oil prices to average $35 to $40 a barrel this year.
“You need to invest large sums of money just to maintain existing production and if you want to grow production to meet the demand growth that we’re expecting, that money has to come from somewhere and we’re seeing big cuts,” he added.
“There will be “barely any supply to meet demand” if investments don’t resume in the next one or two years. Apart from Saudi Arabia and one or two other Gulf state nations, there is little spare capacity around the world. Further ahead, Venezuela’s economic problems may lead to social and political unrest and the potential for supply disruptions in Libya remains a risk,” he argued. Vanguard
