"The fact that the industry fell behind in 2005 investment, the most recent year that complete data is available, means there will likely be a continued tight supply demand balance in and beyond 2010, in spite of a 70 percent investment increase in 2005 over 2000."
The Platts study shows that the shortfall in 2005 could lead to a 0.8 million barrel per day reduction in anticipated spare capacity within three years, if the International Energy Agency (IEA) demand forecast is correct. This shortfall could grow to 4 million barrels per day in 2011 as existing fields continue to decline and demand rises. Anticipating a demand of 90 million barrels per day in 2010, the industry needed to invest $435 billion in development drilling and production facilities ($350 billion) and refining capacity ($85 billion) back in 2005, says Chorn. But, according to recently released IEA estimates, the industry (including national oil companies) were only able to commit $340 billion with $225 billion directed to field development.
The investment shortfall is indicative of several forces at work. Analysts have long expressed concern that producing countries are closing off resource access to multi-national companies, thereby slowing development. Further, a limited supply of experienced engineers and geoscientists means fewer and fewer large projects can be staffed in a timely manner.
"Spare capacity in 2006 was approximately three percent or 2.5 million barrels per day. The scarcity of spare capacity makes crude oil inventory management all the more important to the refining industry and the markets. Spot prices are clearly impacted today by unexpected drawdowns reflected in the EIA crude inventory weekly reports. One peripheral consequence of the analysis is that we should expect inventory markers' influence on spot and month-ahead prices will grow," Chorn says.
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