Oil-Price Rebound Could Be Severe

LONDON (WALL STREET JOURNAL via Dow Jones Newswires), October 29, 2008

The slump in oil prices has spread relief among consumers and fuel-reliant industries, but also is squeezing the companies who could invest in new sources of oil -- spurring concerns that prices will prompt them to shelve investments.

Industry executives warn that could mean the world will face a dramatic ramping up of prices as soon as the global economy, and demand, begins to rebound.

"Low oil prices are very dangerous for the world economy," said Mohamed Bin Dhaen Al Hamli, the United Arab Emirates' energy minister, speaking Tuesday at an oil-industry conference in London. "We need an adequate and reasonable oil price that will continue to stimulate investment." With prices now languishing, he said, "a lot of projects that are in the pipeline are going to be reassessed."

The global economic slowdown has driven down demand for oil, pushing crude prices to levels not seen since the spring of 2007. In an attempt to stem the decline, the Organization of Petroleum Exporting Countries agreed last week to slash output by 1.5 million barrels a day -- its biggest single reduction in almost eight years.

But the move didn't stop the slide. U.S. benchmark crude for December delivery fell 49 cents on Tuesday, or 0.78%, to $62.73 on the New York Mercantile Exchange. That is down about 57% from its record high of $145.29 in July.

Nobuo Tanaka, head of the International Energy Agency, the Paris-based watchdog, was one of several experts at the annual Oil and Money conference here predicting that the industry could be setting the stage for yet another supply-and-demand whiplash down the road. "We're concerned that supply won't catch up with demand after this crisis," Mr. Tanaka said. "The supply crunch may come again, but in a more acute way."

The price of crude began its rally five years ago, when an oil industry that hadn't invested enough in new capacity during the years of low prices failed to cope with surging demand from the booming economies of China and India. That scenario could now play out all over again. "I hope we don't go through the same cycle," said Mr. Al Hamli.

In two years' time, "we could see much higher prices than we saw three months ago, if the investments are not going through," said Fatih Birol, the IEA's chief economist.

To be sure, most big oil companies have shown no sign of trimming their investments. Royal Dutch Shell PLC says it is sticking to its capital-investment target of $36 billion for this year -- the largest in its history -- and Chevron Corp. is also charging ahead with its $23 billion program.

Most of the majors' big projects are designed to break even at prices substantially lower than the current cost of crude. "I don't think there will be major changes in investment," said Paolo Scaroni, chief executive of Italian oil company ENI SpA. "Maybe in unconventionals, but not conventional oil projects."

Yet it is precisely the so-called unconventionals that have become a big focus of the oil companies' activities in recent years. Billions of dollars have been poured into squeezing crude out of Canada's gooey tar sands, converting Venezuela's heavy oil, and pumping ultra-sour natural gas in the Middle East. Some of those projects could now be scaled back or even abandoned, conference speakers said. Already, some independent companies producing natural gas in the U.S. have announced cuts in investment.

"If this oil price stays low, alternative energy, Canadian oil sands, Brazilian new discoveries will be out of the market," said Abdalla Salem El-Badri, OPEC's secretary-general.

Though forecasters expect demand for oil to be flat or even negative next year in the rich world, it is likely to grow in countries like China, whose economy has so far weathered the world-wide financial crisis.

Mr. Birol said falling oil prices will also deter investment in alternative energy. Low-carbon technologies such as wind and solar were economically competitive only so long as oil prices were high. Countries set to meet in Copenhagen next year to agree a new deal on curbing emissions may decide it is a "luxury" in view of the financial crisis. Lower oil prices are "not good news for climate change," he said.  

Copyright (c) 2008 Dow Jones & Company, Inc.

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