(Bloomberg) -- As the oil patch grows accustomed to a new world of $50 to $60 crude, it’s now looking ahead to a different but equally daunting sort of cliff.
Oil companies are warning there will be a price to pay -- a much higher price -- for all the cost cutting being done today to cope with the collapse in the crude market. Big projects intended to start pumping oil and natural gas 5 to 10 years from now are being canceled or put on hold as the price crash forced $114 billion in spending cuts on the industry.
Energy giants from Exxon Mobil Corp. to Royal Dutch Shell say they’re taking a much more cautious approach to approving projects that cost billions and take years to complete. That’s setting the table for a future oil-price shock when a growing world population drives higher demand, said oil executives and financiers at the IHS CeraWeek Energy Conference in Houston.
“What we decide today will have an effect on the future,” Patrick Pouyanne, chief executive officer of Total SA said Tuesday during the event. Postponing spending on mega-projects that usually deliver significant quantities of oil or gas “will have an impact. This could affect supply in three or four years.”
Demand has already begun to show signs of strength. The Paris-based International Energy Agency last week raised its forecast for 2015 demand, projecting that the world will consume 94.7 million barrels a day of crude in the fourth quarter, a potential increase of almost 1 million barrels over the same period in 2014.
U.S. output in shale formations is expected to fall as soon as next month, according to the U.S. Energy Information Administration. Oil production decreases due to spending cuts and decline from aging fields, combined with demand growth, are likely to push prices higher in the next six months to two years, said Ralph Eads, vice chairman and global head of energy investment banking at Jefferies Group Inc.
“I don’t see how the market isn’t going to be in an undersupplied position,” Eads said in an interview. “If you look around the world, where’s the deliverability going to come from? That’s the head scratcher. You just don’t know. It’s hard to make the math add up.”
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