IEA: downturn sets up surge in oil prices

(From THE WALL STREET JOURNAL)
By Spencer Swartz

LONDON -- Energy investment is "plunging" because of the recession, paving the way for
oil-price surges within three years, the International Energy Agency warned in a new report.

The Paris-based watchdog for the world's major energy-consuming nations said that in recent
months, oil companies and investors have canceled or postponed about $170 billion of investment
equivalent to roughly two million barrels a day in future oil supply.

An additional 4.2 million barrels a day in future oil-supply capacity has been delayed by at
least 18 months as companies slash spending.

The study will be presented to energy ministers from the Group of Eight industrialized
nations this weekend in Rome and to G-8 leaders at a July summit.

The report highlights the growing risk that the crude supply -- though currently abundant
because of weak global consumption -- could tighten quickly once the world economy gets back on
its feet.

"What we're saying is that come around 2012 the impact of this big recession on oil
investment and capacity, if current trends continue, could be severe with much higher oil
prices," said IEA chief economist Fatih Birol. The IEA is funded by the world's 28 biggest
energy-consumers, notably the U.S. and Japan. It has long argued for more aggressive investment
in building oil capacity.

The report, which was reviewed by The Wall Street Journal, also notes that most delayed or
canceled projects are located in politically stable non-OPEC nations like Canada. Those
resources take more years to develop than crude oil found in the members of the Organization of
Petroleum Exporting Countries, which is typically easier and cheaper to get out of the ground.

The rate at which world oil demand recovers remains a critical -- and unknowable -- variable.
Several governments in the developed world are advancing energy-efficiency measures, which
could temper the rise in oil prices as demand recovers.

The IEA estimates oil demand this year will fall by 3%, the sharpest drop in about 30 years,
to about 83 million barrels a day.

Many analysts, however, say they believe crude prices in the next few years could again soar
over the $100-a-barrel mark seen last year because of two factors: relatively rapid energy
consumption growth in emerging markets like China and the fact that much of the world's
easy-to-tap oil is already discovered.

Benchmark crude prices on Tuesday closed up 62 cents at $59.65 a barrel on the New York
Mercantile Exchange.

Through criticized at times for missing some industry developments, the IEA is still seen as
one of the most reliable energy statisticians in the industry, in part due to data from its
member countries.

The agency said Canada, with the world's second-biggest proven oil reserves after Saudi
Arabia, has been worst hit by falling investment.

Around 15 Canadian oil-sands projects involving 1.7 million barrels a day in production
capacity and $150 billion of investment have been suspended or canceled. Oil sands yield a
viscous and expensive-to-produce crude.

But oil sands usually need at least $55 to $60-a-barrel crude prices to be produced
profitably. Oil has traded below that level since late last year.