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The huge decline in oil prices over the last eight months will have long term repercussions, higher prices over the long term, as the lack of investment in new production will eventually hit the market.
According to the Wall Street Journal, citing a report from Cambridge Energy Research Associates (CERA): "The global credit crisis and falling oil prices have squeezed oil companies' finances and forced many to cut capital spending and postpone projects. That could have big implications for supply when the global recession ends and demand for energy recovers, the report by Cambridge Energy Research Associates says."
Already Mexico, Russia, Indonesia, and Nigeria are recognized as having falling production, but according to the Journal: "The slowdown in investment in oil and gas production could lop off nearly eight million barrels a day of future oil supply growth, setting the stage for another big crude price surge in years to come."
At the center of the issue is "project cancellation" due to the economic decline. This new trend has led CERA to change its mind. Last summer, before the econmy began to falter CERA predicted that "that world oil production capacity would rise to 109 million barrels a day by 2014 from the current 94.5 million barrels a day. It now says 7.6 million barrels a day -- or slightly more than half of that increase -- is "at risk" due to project deferrals or cancellations." This is a significant change for Cambridge, a firm that for years has been fighting the generally accepted concept of Peak Oil. And although they are not endorsing the concept, it's important to note that this is indeed a change of heart for them.
Perhaps the most important analytical point of the report is the fact that Cambridge concludes that this lack of investment and "project cancellation" is going to be a "potentially powerful and long-lasting aftershock," as the fall in crude oil prices from $150 to $50 over several months left the oil industry reeling.
So why are these companies pulling back? Well for one thing, why flood the market when demand is low. But for another, some of the projects that have been postponed or scaled back simply aren't profitable without oil prices being high. Included areas of production include Canada's oil sands as well as some offshore projects in Africa.
According to The Journal: "Middle East oil producers, hit by falling export revenue, have reined in spending plans. The Organization of Petroleum Exporting Countries says as many as 35 new projects in OPEC countries could now be delayed past 2013. Most Western oil companies say they are sticking to their investment plans but are slowing down some developments."
And here are some sobering thoughts to ponder as the weekend approaches: "CERA said it expects many new projects in Angola, Nigeria, the Gulf of Mexico, deepwater off Brazil, Canada's oil sands and Venezuela's hard-to-extract heavy oil to be postponed or canceled."
Conclusion
The recent rally in stocks has been a welcome respite from the daily clawing and gnawing of the bear market. Yet, even the most positive of thinkers has to factor in the potential for more trouble in the future if oil prices climb above $60 per barrel and continue to rise beyond that.
Already gasoline prices are off of their recent lows with $2.00 per gallon for regular looking as if if will be appearing at the corner gas station, if it's still there, at some point in the not too distant future.
Those of us who have been talking about production cuts and just a general decrease in easy oil supplies for years, should be more concerned than ever, as CERA has been the vanguard of opposition to the view that long term oil supplies will be much tighter in the future.
In essence, the fact that CERA is throwing in the towel is an important sign of capitulation. However, in this instance, we don't believe that this is a contrarian sign. We think that CERA's right. Oil supplies are going to get tighter. The real question, though, is whether that means that prices will rise, or that the lack of oil will squeeze the global economy into an even deeper recession.
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