Azara Blog: Oil demand not increasing medium term supply

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Date published: 2005/05/04

The Financial Times says (subscription service):

Investment in new capacity by oil-producing nations and energy companies is too small to meet future growth in demand, the developed world's energy watchdog warned on Tuesday.

Claude Mandil, head of the International Energy Agency, said even though energy prices were near record levels, the world was not investing enough in oil and gas production, refining, power generation and transmission.

Mr Mandil's comments, at the IEA's biennial ministerial meeting, highlight growing concern about energy industry strategies.

Global investment in the sector remained below the IEA's 2003 estimate of the $16 trillion needed by 2030 to meet projected demand, Mr Mandil said.
Many analysts echo Mr Mandil's comments, fearing that the world's biggest listed oil companies are basing their plans on a low oil price. Lehman Brothers and Citigroup say private oil companies' investment in exploration will rise by less than 6 per cent in 2005, against 12 per cent last year.

In spite of the sharp rise in crude prices over the past four years, large oil companies still decide on their projects based on in an oil price of $20 to $25 a barrel and are returning cash to shareholders rather than investing.

But Lord Browne, BP chief executive, last week dismissed the idea that his company was underinvesting, arguing his responsibility lay in ensuring sustainable growth.

BP and ExxonMobil, the two biggest listed oil groups, say that when making investments that may last for 25 years they will assume only a $20 per barrel.

It's hard to believe that oil will ever again be $20 per barrel, unless the world economy nosedives. But the oil (and gas) companies (and suppliers) are in a win-win situation until the world finds a plausible alternative source.

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