And now... an oil crunch?

Friday, 8 August 2008 12:00 AM

The UK's economic woes come from a toxic cocktail of credit crunch and sky-high oil prices. But while some analysts expect the effects of the credit crunch to improve within months, the problem with oil is looking far more severe.

A new report has warned an 'oil crunch' looms on the global horizon, unless there is a dramatic reduction in demand.

The report - Oil: The Coming Supply Crunch - was conceived by thinktank Chatham House, and argues world supplies of oil will be severely restricted within five to ten years.

If this is the case the price of a barrel of oil could surge past $200, forcing prices for everything from petrol to plastics higher as a result.

Chatham House - which seeks to promote the understanding of major international issues and current affairs - finds investment in new supplies of oil 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.

Insufficient funds and expertise were invested in the 1990s to maintain excess capacity to produce crude oil if consumption continues along present trends.

When spare capacity is utilised in the present market, the price of oil rises sharply - as high as $137 a barrel in recent weeks.

Supply has also been curtailed by a resurgence in 'resource nationalism' - with governments starving their national oil companies of investment funds.

"While the forecast is controversial and extremely bullish, even allowing for some increase in capacity over the next few years, a supply crunch appears likely around 2013," Chatham House says.

"The implication is that it will quickly translate into a price spike although there is a question over how strategic stocks might be used to alleviate this."

If those predictions come to fruition governments may be forced to develop interventionist policies in domestic energy sectors.

To ward off a potential crisis, producers will have to be helped to manage 'resource curse' issues, sovereign wealth funds will need to be welcomed and OPEC has to be brought into the International Energy Agency's emergency sharing mechanism.

Chris O'Toole

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