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David Olive

BUSINESS COLUMNIST

It's been a relief while it has lasted. Lower oil prices, that is. But the days of cheaper oil are numbered.

The brief respite from last summer's record-high crude prices, which aggravated the global economic slump, will soon give way to another oil-price spike that may be more painful than the last one.

"The stage is currently being set for oil prices to skyrocket," says U.S. energy analyst David Fessler in the online investment newsletter Investment U. Fessler cites the decline of such super fields as the North Sea, Alaska's North Slope, Mexico's Cantrell Field and Saudi Arabia's Ghawar Field – largest in the world – along with the extraordinary cost of producing crude from the few remaining newer crude sources such as Alberta's Athabasca tarsands and reserves six or seven kilometres below sea level off the coast of Brazil.

That's a view shared by most of the world industry's veteran experts.

"As the economy picks up, spare capacity will start to erode, and the oil market could tighten up again in the first half of the decade," Daniel Yergin, dean of world oil economists, said in U.S. congressional testimony May 21.

At the same hearing economics professor James Hamilton of the University of California at San Diego added: "If demand in China and elsewhere returns to its previous rate of growth, it will not be too long before the same calculus that produced the oil-price spike of 2007-08 will be back to haunt us again."

Under the worst-case scenarios the experts envision, you can take your pick between $100 (U.S.) per barrel oil in the near term and double that amount by 2014 or sooner.

The recent oil-price recovery to a six-month high of $62 (U.S.) per barrel earlier this month, up from a nadir of about $35 (U.S.) per barrel early this year, is "impressive given the severity of the downturn in global industrial production," says long-time investment analyst Ed Yardeni, chief strategic analyst at Yardeni Research.

"It suggests that oil traders are expecting that once the global economy recovers, supplies will tighten up quickly relative to demand," Yardeni says.

"It will be back to the future."

Then there's T. Boone Pickens, legendary oilman turned champion of alternative energy sources.

Pickens told Fox News earlier this month, "You're going to be back to $75 (U.S.) oil by the end of the year, and $200 (U.S.) per barrel within five years."

It's no less true for being obvious: When oil collapsed more than 70 per cent from its July 2008 record high, many major oil firms slashed their exploration budgets because the lower prices did not cover the expenses of today's high-cost reserve plays.

The worldwide credit scarcity didn't help.

In nations within the Organization of Petroleum Exporting Countries (OPEC), as many as 35 new projects have been delayed to 2013. About $100 billion worth of Alberta tarsands expansion projects are on hold. Civil wars continued to rage in Nigeria, America's fifth-largest source of oil imports. Conflict has taken the lives of hundreds of people in the west African nation this month. Major disruptions in production in the oil-rich Niger Delta have been routine for the past five years.

All of this means that when global demand comes roaring back – as it will in China, India and other emerging economies –and returns to its pre-recession levels in mature economies in North America and Europe, the needed additional supply won't be there to satisfy the resurgent demand except at exorbitant prices.

"I've often described unsustainably low oil prices as carrying the seeds of future spikes and volatility," Ali al-Naimi, the Saudi oil minister, said recently. "If we place a low priority on preparing for the future, that lack of action can come back to haunt us through supply shortages and another round of high prices."

Officials at the International Monetary Fund are especially concerned about the impact of an oil-price rebound on impoverished economies. They regret that the current period of lower drilling costs was not seized upon as an opportunity to get long-term projects underway.

"The lower that oil prices drop now the greater the negative impact on future supply," John Lipsky, first deputy managing director of the IMF said at an OPEC summit in Vienna in March.

As oil prices were peaking last spring, Yergin's firm was projecting an increase in world oil capacity to 109 million barrels a day.

The subsequent "capital strike" by exploration companies has forced Yergin to revise that figure down to a current 101.4 million barrels a day. That's a "squeeze" scenario similar to the recent years of escalating prices, when the gap between supply and demand became been razor-thin.

French oil producer Total S.A., one of the few companies to maintain an aggressive exploration program, including efforts to build a large presence in the Athabasca tarsands, is gloomier still. Christophe de Margerie, Total's CEO, said the proliferation of project cancellations means the world's producers will be struggling by the middle of the next decade to keep supply at even 90 million barrels a day.

Noting that oil still accounts for 40 per cent of U.S. energy supplies, Yergin told the U.S. congressional panel that: "We should give clear signals to Canada to develop its oilsands and to Brazil to develop its offshore oil. We should do more research on cleaner uses of coal. We should encourage more domestic natural gas production through hydraulic fracturing. And we should be prepared to use more of our offshore oil and gas deposits by encouraging their development in an environmentally intelligent manner."

Those are fighting words to most environmentalists, who believe no amount of research will yield "clean coal and despair at the pollution risk of U.S. offshore drilling.

The environmentalists are pitted against North American consumers, who promptly lost their ballyhooed interest in small cars once oil prices fell.

dolive@thestar.ca