Oil Security at Risk | Russell T. Rudy Energy LLC
High prices lead to increased investment and production which leads to a glut which results in a price collapse, which in turn gives rise to investment, and subsequently production cuts and price recovery. We can wring our hands in despair, or reconcile ourselves to the boom and bust nature of the energy business, or, alternatively, learn from History. “Oil World” reports that the International Energy Agency (IEA) is concerned that historic investment cuts compromise the developed world’s energy security in the not too distant future.
Neil Atkinson, head of the agency’s Oil Industry and Markets Division observes that about $300 billion of energy investments is necessary to sustain current levels of production. He contends that the U. S., Canada, Brazil and Mexico are all falling behind. He feels that “We need a lot of investments just to stand still. 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.”
Understandably, operators have canceled more than $100 billion in investments, slashed dividends, and sold assets in an effort to maintain liquidity in the face of the oil price collapse. However, these short term actions are not without longer term consequences.
As for short term price recovery, Atkinson is not optimistic. He dismisses the recent agreement between Russia and some OPEC members, to limit output to January, 2016 levels as having no impact whatsoever on global energy markets. He is also skeptical that a planned follow-up meeting in Doha next month to discuss cutbacks will take place, much less have any meaningful effect.
However, the IEA thinks that after two years of decline we might have seen the worst of price erosion as supplies outside of OPEC are starting to shrink and disruptions inside the cartel are likely. Admittedly, U. S. inventories are over 523 million barrels, the highest level since 1930. Nevertheless, Atkinson feels these should start to come into balance with demand by the second half of this year.
Atkinson sees the global oil market reaching equilibrium in 2017 and stockpiles diminishing from 2018 to 2021. This in part will be due to a 1.2% annual growth rate in demand. While significantly less than what we have seen over the past six years, this is still significant.
He goes on to say that at current investment levels there will barely be sufficient supply to meet incremental demand outside of OPEC. Any spare capacity will be in Saudi Arabia and one or two other Gulf nations. Meanwhile there is risk of supply outages. Atkinson dismisses recent disruptions in Nigeria and Iraq as “episodic”, but longer term sees significant exposure in Venezuela and Libya.
To read the article in its entirety, please go to http://www.worldoil.com/news/2016/3/23/oil-security-seen-at-risk-by-iea-on-historic-spending-cuts .
Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide. Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.
