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The Coming Oil Supply Crunch

8 August 2008

The world will experience a serious oil supply crunch within five to ten years unless there is a collapse in oil demand. This is the conclusion of a new Chatham House report, The Coming Oil Supply Crunch, which predicts a resulting oil price spike that could exceed $200 a barrel.

Investment in new supplies has been and will be inadequate. This is partly due to incentives for international oil companies to return dividends to shareholders rather than reinvest them. It is also a result of a resurgence in 'resource nationalism' and some governments starving their national oil companies of investment funds.

To ward off a potential crisis, the report recommends helping producers manage 'resource curse' issues, welcoming sovereign wealth funds and bringing OPEC into the International Energy Agency's emergency sharing mechanism.

The rise in price itself has continued partly because OECD governments are reluctant to intervene in energy markets. The market alone cannot necessarily provide sufficient incentives for conservation, fuel-switching or bringing more energy on-stream, so this laissez-faire attitude has failed to either constrain demand or increase supply. But, given the coming price spike, governments may well be forced to change tack.

Professor Paul Stevens, the report's author, explains the dynamics of current high prices in comparison with past oil shocks. The report argues that not enough money and expertise were invested in the 1990s to maintain excess capacity to produce crude oil if consumption continues along present trends. History shows us that whenever such excess capacity is run down, the oil price rises sharply.

Notes to Editors:

Read The Coming Oil Supply Crunch >>

Paul Stevens is Senior Research Fellow for Energy at Chatham House and Emeritus Professor at Dundee University. He has published extensively on energy economics, the international petroleum industry and the political economy of the Gulf.

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