Thursday, November 27, 2008

IEA warns of oil shock

Nov 26, 2008

By Robin Chan

AN even worse oil shock could occur in the future if the Organisation of Petroleum Exporting Countries (OPEC) does not keep up investments in oil exploration and production amid the economic crisis, the International Energy Agency has warned.

Mr Nobuo Tanaka, IEA's executive director said on Wednesday: 'If they (Opec) reduce their supply in the future, when demand comes back, when the economy goes back on its trajectory, we may have a serious supply crunch again, maybe more acute than what we saw this year.'

The price of oil soared to a high of US$145 (S$219) a barrel in July as demand far exceeded supply. But this has since come down dramatically to around US$50 as the financial and economic crisis put a dampener on demand.

But as oil prices have come down and companies are hit by tightened credit, there is now concern that oil companies will cut down on their future investments.

Speaking on the sidelines of the launch of the World Energy Outlook 2008 in South-east Asia, Mr Tanaka on Wednesday said the fall of oil to US$50 per barrel is 'alarming.'

He said that this may slow down future investments for non-conventional oil production where costs are higher.

However, he added that production costs for conventional crude oil in the Middle East and Opec countries is much lower and the current price level is enough for them to maintain their production.

'We do not tell Opec how much to produce' Mr Tanaka said. 'What we can say to them is to maintain their level of investment which they plan and commit to and not cancel, not slow down or postpone their investment. That will create another spike when economic growth comes back.'

Mr Tanaka said the low price of oil has given some breathing space for consumer countries.

Asked if he was concerned about deflation next year, a sustained decline in prices during a recession, he said: "Deflation or not, US$50 oil is still a very high price.'

'But we are carefully watching what demand prospects are next year. The current projection is that demand will still grow globally. There will be a very strong decline in OECD countries, but robust growth in China, India and the Middle East will offset this decline. So as a whole we see net increase in demand next year still.'

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