Financial Times Editorial Comment: Oil supplies are down and alternatives not yet available
Copyright The Financial Times Limited 2007
Published: July 10 2007 22:21 | Last updated: July 10 2007 22:21


A rule of thumb for the price of oil in the past five years has been to take the last digit of the year and add a zero: 2002 saw prices in the $20s; 2003 in the $30s; now oil is hovering around $70 a barrel. These high prices are desirable for steering the economy away from oil, but in the meantime they could also spell trouble. Oil companies need to adjust to this new reality and rethink their business model.

The latest report by the International Energy Agency warns of an oil supply crunch in five years. Demand is expected to rise at more than 2 per cent annually. Supply, the IEA calculates, will not be able to keep pace. Nations outside the Organisation of the Petroleum Exporting Countries are expected to add about 1 per cent to supplies per year. That puts most of the burden on Opec, in particular Saudi Arabia, which would face capacity constraints itself, the IEA says.

In many ways, the rising oil price points to a market at work: demand is up, supply is lagging and prices rise. That high price should fuel a search for alternative sources of energy and lead to more exploration and exploitation of oil supplies. Yet the IEA reckons that ethanol and other biofuels will not be ready to make a sufficiently significant dent in the market within five years.

The report also notes a disconnect between higher dividend payments to shareholders and little real change in exploration and production activities. On this analysis, oil majors are enjoying the fruits of past investments without providing adequately for their own financial future. This week, ConocoPhillips became the latest major to announce a share buy-back, on which it will spend $15bn.

These moves make some corporate sense now, given the mix of physical shortages and political risks: some regimes with cheap oil, such as Iran and Iraq, are unlikely to add capacity any time soon.

Yet the oil majors’ actions do not address the wider question of the world’s energy resources in future. This requires the majors to rethink their business model. National oil companies have most of the oil, but face production constraints. Many of the skills to extract that oil rest with the majors. Instead of focusing on developing their own resources, they should be willing to sell their expertise to state-owned firms that have the oil but lack some of the skills to get it out.

This approach will mean lower profit margins, but should help to avert the threat of a popular backlash against the oil majors. More importantly, it looks like the best hope of mitigating the looming energy crunch.