Report Warns of Oil Supply Crunch
By Tendai Maphosa London 08 August 2008

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A new report warns of a serious oil supply crisis that could push prices above $200 a barrel unless there is a dramatic drop in demand.  As we hear from Tendai Maphosa in London, a British "think tank," Chatham House, predicts that a "supply crunch" could impact global markets in the next five to 10 years.

Oil refinery

The report blames inadequate investment by international oil companies and oil producing nations for the projected shortfall in supply.

Chatham House's Paul Stevens, who wrote the report, says while there is plenty of oil in the ground, companies and governments are failing to invest enough to ensure production.

He adds that oil firms prefer to return profits to shareholders rather than reinvest them in more production capacity.

"For the international oil companies they are effectively in thrall to their shareholders and in order to keep their shareholders happy they have to increase dividends, they have to push the share price up by buying back their own shares and this effectively represents a flowing out of funds from the investment pot for the industry," he said.

Stevens says what he calls "resource nationalism" adds to the problem, explaining that some countries exclude international oil companies from coming in and helping increase production capacity.

He adds that the OPEC oil cartel's failure since 2005 to achieve its planned capacity expansion goals will contribute to the supply shortfall.

Prices at a gas station on Capitol Hill, Washington DC, 23 May 2008

Oil prices have risen sharply recently. Last month U.S. crude hit a record of more than $147 a barrel. Prices have since eased back to about $120.

Stevens says barring a deep recession that would cut demand or a dramatic change in energy policy, not much can be done to avert the projected shortage.

"There's very little that can be done because of the lead times," he said. "For example, in July President Bush announced that he was going to remove the restriction on exploration on the U.S. outer continental shelf. Even if that happened tomorrow it would be eight to 10 years before the first barrels were coming on shore because of the long lead times involved in the projects so in the short run there is little that can be done."

Suggestions in Stevens' report include allowing OPEC to join the International Energy Authority's emergency sharing plan.

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