“Supply crunch” to drive oil prices to record highs in next decade

posted at 9:05 am on August 8, 2008 by Ed Morrissey
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Maybe someone can send a copy of the latest Chatham House report to members of Congress for their summer reading — at least those who bugged out of Washington DC without voting on opening American oil resources for drilling.  According to the latest study from the British think tank, only a major global recession will keep oil from hitting $200 per barrel in the next 5-10 years.  The reason?  A lack of will to drill:

A “supply crunch” will affect the world market within the next five to 10 years, the Chatham House report said.

While there is plenty of oil in the ground, companies and governments were failing to invest enough to ensure production, it added.

Only a collapse in demand can stave off the looming crisis, report author Professor Paul Stevens said.

“In reality, the only possibility of avoiding such a crunch appears to be if a major recession reduces demand – and even then such an outcome may only postpone the problem,” he said in The Coming Oil Supply Crunch.

The lack of production, and not a lack of raw materials, is to blame for the supply crunch.  OPEC has not expanded its production capabilities despite promises to do so by 2005.  Meanwhile, governments have begun imposing protectionist policies on extraction, forbidding or at least discouraging international oil companies from drilling in favor of less-efficient nationalized oil concerns.
Part of the problem stems from a lack of investment by oil companies in long-term extraction.  Too much of their profits go back to shareholders in the form of dividends or cash to accounts.  In the US, however, the government blocks investment in oil-rich targets, such as the OCS and the shale formations.   They also have difficulties in investing in refining capacity, which would have to expand with any serious increase in domestic production of crude.
What does the report recommend? Emphases mine:

To avoid a crunch, energy policy needs to reduce the demand growth of liquid fuels, to increase the supply of conventional liquids or to increase the supply of unconventional liquids. Ideally it should be some combination of all three. However, when discussing policy it is important to remember the long lead times between applying any policy instrument and any significant supply or demand responses. Only extreme policy measures could achieve a speedy response and these are usually politically unpopular. It would therefore require some form of crisis to allow such policy measures to be introduced – an issue developed below.

To reduce liquid fuel demand requires either greater efficiency or fuel-switching. In reality, both would probably take too long to be effective in the time frame suggested by this study. Only a major recession in the short term could reduce demand growth and even then the probability is that this would merely delay the supply crunch.

Increasing supplies of conventional liquids requires persuading IOCS and NOCs to invest more in expanding crude producing capacity, and producing it. IOCs can be encouraged to increase investment by improved fiscal terms and perhaps by governments helping to open up acreage. In the US this would involve removing current restrictions on drilling offshore and in the Alaskan National Wildlife Refuge.

In other words, this is not Peak Oil or evil speculators. It is a supply crisis, brought on not by natural shortage but artificial, government-imposed shortage. The US government is especially culpable, being the only industrialized nation that blocks oil drilling on large proven reserves — and we do this while demanding increased production from Saudi Arabia and complain when they don’t comply.

Every member of Congress should read this report during the recess. Every American should do the same.

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