October 21, 2009 / 4:42 PM / 10 years ago

IEA says oil price high enough to invest-in theory

BEIJING (Reuters) - Oil, which hit a year-high above $80 a barrel on Wednesday, is costly enough to ensure investment even in the most expensive sources of crude, but the industry still faces big challenges, the IEA’s chief economist said.

The International Energy Agency has voiced concerns of a possible price spike if insufficient investment is made in bringing on new sources of oil to keep pace with demand.

“Oil prices of $78 are high enough for almost every single drop of oil we have in the world to invest, if they were to stay at these levels, if producers were to believe that the prices will stay at these levels,” Fatih Birol told Reuters on the sidelines of a U.S.-China clean energy conference.

International benchmark U.S. crude traded close to $78 early on Wednesday, but later shot above $80 to its highest levels since October last year.

After hitting a record high of nearly $150 a barrel in July 2008, oil prices collapsed to just above $30 in December. Coupled with the impact of the financial crisis, one result was the oil industry postponed some exploration projects.

Abdullah al-Badri, secretary general of the Organization of the Petroleum Exporting Countries, said the group’s members froze about 35 of its projects, but this week he said seven of them had been restarted.


For OPEC countries, dominated by national oil companies, the deciding factors tend to be demand and the price of oil, but for the commercial sector credit is also an issue.

Birol said he believed the medium and small companies had been most prone to curbing investment this year and he believed most of these still had “major difficulties” in accessing credit because of the financial crisis.

For them, higher oil prices would not be enough to allow new production.

“The current situation will not help them substantially to improve their investment plans,” he said.

Another hurdle to ensuring sufficient supply is that valuable oil acreage is concentrated in the hands of national oil companies in a limited number of countries.

“Most of the growth would need to come from the NOCs in a very few countries and looking at those companies’ recent statements, I do not think that they have either the appetite or the will to increase their investment plans,” he said.

In sum, he reiterated IEA warnings made before the latest price rally that fragile economic growth could be knocked back by a rapid rise in oil prices as demand increases.

“I am rather worried about the investment cutbacks in 2009 which in fact may be very bad news if coupled with an economic recovery in the major oil consuming countries and growing oil demand,” he said.

“This may well lead to oil price spikes which in turn may be a major problem for the economic recovery efforts.”

Writing by Barbara Lewis

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