A Second Oil Crisis On The Way?

One of the many reasons that oil prices spiked to $150 earlier this year is that in the 1990s, when prices were $12 a barrel, oil firms stopped looking for new reserves. That resulted in supply shortages and, when demand for oil picked up this decade, spiraling oil price inflation.

Now the same vicious cycle may be starting again. At a recent conference in Barcelona, Fu Chengyu, the head of the Chinese state oil giant CNOOC, said that he had met with the heads of 27 state oil firms, and that some 60 percent of planned exploration and development projects slated to begin in the next two years were being canceled because they were pegged to $70 oil (prices last week fell below $50). "Many [state companies] are panicked," he said. "They don't have enough cash to do all of the projects."

Russian giants Rosneft and Gazprom, which depend heavily on debt financing, are scaling back (Gazprom has canceled construction of a glitzy headquarters in St. Petersburg). Petrobras, the Brazilian company that last year made one of the largest new finds in a decade (in deep water off Rio) has delayed its review of the new area because of the credit crunch. No wonder the International Energy Agency has begun warning of a second supply shock thanks to underinvestment by state companies, which now control the vast majority of reserves.

A Second Oil Crisis On The Way? | World