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The Oil Investment Dilemma

A drop of over 50 percent in oil prices from their summer high of $147 per barrel seemed like good news to many beleaguered consumers. Instead, experts are signaling alarm. "Prices are falling, but they're falling for the wrong reasons: because of reduced demand and [as] a consequence of reduced economic activity, not because we have increased supply or increased energy efficiency," BP Chief Executive Tony Hayward said this month (AP). This precipitous drop, coupled with a shaky global financial system, has some oil experts worried about future investments in new oil production. In October, International Energy Agency Executive Director Nobuo Tanaka said delays in investment in oil projects might lead to a supply crunch (WSJ) by 2015.

With prices hovering in the $60-per-barrel range and credit increasingly unavailable,oil producers worldwide are already beginning to rethink investment plans or scale back on existing projects. Small African oil producers face mergers or takeovers (Reuters) given that relying on equity or debt to finance drilling and production may no longer be an option. Small production firms in the Middle East face a similar fate (The National), though the region's state-run oil giants can afford to continue investing from their huge cash reserves.

Oil has also become more costly to extract. An increasing amount of new output comes from more expensive "technically complex fields" (PDF), writes Christine Jojarth of the Global Oil Governance Performance research project at Stanford University.For example,Canada's oil sand development projects need at least a $65-per-barrel oil price just to break even (Canadian Press). Other experts say many new oil projects remain viable even at current prices (DowJones).

The investment picture poses special concerns for producers that are not...

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