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High oil output will be a challenge

Stephen Beard May 22, 2008

High oil output will be a challenge

Stephen Beard May 22, 2008


Scott Jagow: The price of oil is escalating at an absolutely torrid clip. It’s at $135 a barrel this morning. That’s $5 more than it was yesterday morning.
The ever-weakening dollar certainly isn’t helping. But right now, it seems to boil down to econ 101. Supply versus demand. Oil reserves in the U.S. are shrinking, and oil fields around the world aren’t churning out enough oil to keep up with the insatiable demand. In fact, the International Energy Agency is working on a study of 400 oil fields.

Let’s bring in our man in London, Stephen Beard, on this. Stephen, what’s the IEA say about these fields?

Stephen Beard: It says that the problem is a lot of them are getting pretty old, and a major problem is lack of investment. Companies and countries simply have not been putting enough money in to develop these fields and to produce more capacity.

Jagow: And what does this mean for the price of oil in the next few years?

Beard: Well, it obviously means there’s going to be upward pressure. Now, the higher the price goes, that presumably will dent demand. But we’ve already as you say got oil at $135 a barrel. Goldman Sachs is forecasting $200 a barrel next year.

Jagow: Well Stephen, does the IEA have any suggestions on how to alleviate this supply/demand gap?

Beard: The agency says what’s required is much more investment. Now, if this were a completely commercial industry, these high prices would trigger automatically a lot more investment. But as Leo Drollas, a highly respected oil analyst here in London, points out, this is not a completely commercial industry:

Leo Drollas: Oil-producing countries have nationalized industries. In a number of cases, the funds that are, so to speak, given back to the industry to invest and expand upward are not forthcoming.

Beard: So, he says, the oil producers really do have the consuming nations over a barrel:

Drollas: In the bygone era, gun boats would have been sent out to areas that were reluctant to produce more oil, so to speak. But of course these days, it can’t be done.

Beard: Although, of course, as we know, Congress is considering an alternative — it is talking about suing OPEC.

Jagow: So law suits instead of gun boats.

Beard: Haha, indeed.

Jagow: All right, Stephen Beard in London. Thank you.

Beard: OK, Scott.

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