"The inventory of potential new oilfield developments, including fields that could be developed and brought online during the next five years, remains adequate to meet likely demand in the medium- to long-term," says CERA Senior Director Peter M. Jackson, an author of the report. "This, however, depends on sufficient and timely investment." The steep decline in oil prices has, so far, not been matched by an equal decline in the cost of developing new oil fields or in fiscal terms. This means the economics of a significant share of potential future oil supply growth have deteriorated to the point where it risks "being slowed down, postponed, or cancelled altogether. Slower growth in oil production capacity over the next five years could lead to the next period of rising oil prices, but much depends on the recovery of world oil demand - which CERA predicts could fall as much as 2.3 mbd in 2008 and 2009 combined - and the reaction of the oil industry and government policies.
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"Investment decisions are rooted in expectations about future value, and while long-term oil price expectations are critical, so are upstream development costs," added Jackson. "The oil price needed to justify investment will decline as the cost base falls, but this readjustment may take time to unfold, and lower costs will not necessarily equate with increasing activity levels." The potential reduction in capacity represents a potentially powerful and long-lasting aftershock following the oil price collapse that began in 2008. Using proprietary databases from CERA and IHS, the report analyzes how global oil supply could be reshaped by lower oil prices and the credit crisis. "Seven consecutive years of rising oil prices - unprecedented in the history of the oil industry - have come crashing down, thus burying the notion that the commodity price cycle was a historical relic," the report says. "Instead, old truths have been reaffirmed. Sustained rising oil prices do, eventually, affect demand trends. One-way bets on oil prices eventually go awry." The report adds that the "commodity price cycle" is affected "by global economy, geopolitics, and technology. The question today is, as always, 'When will the next swing in oil price occur?'" Economic growth and oil demand will be key factors that also affect future supply. After declining in 2008 and 2009, CERA expects oil demand to pick up in 2010. However, "If oil demand does not begin to recover next year, the oil market could face a large surplus of production capacity for the next several years - even if growth in production capacity slows significantly," said James Burkhard, CERA managing director and an author of the report.
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CERA: Low Oil Prices Putting Supply Growth at Risk - FOXBusiness
