Oil price shock is months away, warns consultant

The global financial crisis and a collapse in the oil market had stalled vital investment in oil exploration and production and were likely to lead to a sharp spike in prices, an energy consultant and financier said on Thursday.

Matt Simmons, founder of Houston-based investment bank Simmons & Company, argues that the underlying rate of decline of the world's ageing oilfields is as much as 20 percent a year and only high levels of investment can reduce that to single digits.

With credit tight and oil prices almost $100 (R952) a barrel below its 2008 highs, oil companies were unable to sustain previous levels of spending and the result was falling production, he said.

"We are three, six, maybe nine months away from a price shock. We are not talking about three to five years away - it will be much sooner," Simmons said.

"These prices now are dangerously low. The lower prices fall the less oil will be produced and the greater the chance of an oil spike," he said.

Oil prices hit record highs of almost $150 per barrel in July 2008 but have tumbled since then as the global economic downturn has cut energy consumption by consumers and companies alike.

Prices have rallied from less than $35 a barrel in December to more than $50, but remain well below what many oil companies and producing countries say they need to invest in new production.

Simmons, a proponent of the "peak oil" theory, has argued for years that world output is in irreversible decline because oil industry infrastructure is getting too old.

He said the cost of rebuilding the oil industry was colossal - "closer to $100 trillion than $50 trillion" over decades. "The industry's asset base is beyond its original design life."


Simmons' 2005 bestseller "Twilight in the Desert, The Coming Saudi Oil Shock and the World Economy", argues that oil output from the Middle East's biggest supplier is reaching an apex and will soon decline, ending the era of cheap oil.

Saudi Arabian oil company Aramco and many other analysts strongly disagreed with that thesis, saying Simmons exaggerated the rate of decline of older oilfields.

Cambridge Energy Research Associates last year put the world's oilfields decline rate at only 4-5 percent a year.

But Simmons' concerns over the impact of the credit crisis and the dramatic fall in oil prices are shared by many other, more conservative bodies, including the International Energy Agency (IEA), which advises 28 industrialised nations.

IEA deputy executive director Richard Jones warned the oil market this week that so far, as much as two million barrels a day of new upstream capacity due to come on stream had been deferred for now, due to lack of funds and low oil prices.

The IEA is worried that recent cuts in oil production by cartel Opec in an attempt to bolster prices have left oil inventories dangerously low, leaving little room for manoeuvre when oil demand recovers.

Simmons said many Opec producers would find it difficult to bring production back to previous levels once prices recovered.

"When you have an old oilfield whose flow is being maintained by extremely high levels of investment and you reduce production, you rarely if ever get back to where it was." - Reuters