For many parts of the world, 2009 has been a year of decline.  We need 2010 to be a year of recovery and renewal.  This process starts with sound investment strategies for long-term growth.  In the case of oil, the outlook is generally favorable, with prices forecast to ease steadily upwards and demand growth to rise by over 1 million barrels per day (mb/d).

In their recently published 2010 crude oil outlook, Société Générale raised their demand growth forecast for China from 270,000 b/d to 320,000 b/d.  They suggest that stabilization of demand in OECD countries will “allow global markets to truly ‘feel’ the Chinese and other non-OECD growth for the first time in six quarters.”  OPEC inventories will trend downwards through the year.  Of course, as demand rises and supplies tighten, prices can rise further and become more susceptible to volatility.  For the United States and other nations whose economies are today highly dependent on oil, this has a considerable cost both economically and with respect to national security.

Supplies need to react.  And yet capacity expansion and greater flows of oil will ultimately be required to match the growing demand from developing nations in particular.  This last week has seen two high profile events that highlight both supply concerns previously lying just under the surface and the very real practical risks of developing oil in some nations.  First, on Friday, the Iraqi government announced that Iran had seized an oil well in southeast Iraq.  Crude oil futures surged in response.  Disputes between major producing nations pose a serious risk to global oil supplies because they have the potential to either stop production occurring from particular fields, or dissuading investors in as yet undeveloped fields.  Iraqi oil supplies are forecast to rise in 2010, but getting to this point has been a very slow process.  In fact, the U.S. DOE still does not consider Iraqi (or Iranian, among others) oil capacity in its calculations of OPEC spare capacity because the supplies are so often disrupted.  Next, on Sunday, Shell decided that it would sell 10 onshore licenses in the Niger Delta region estimated to be worth as much as $5 billion.  The development produced an average 400,000 boe/d in Q3 2009, with 600,000 boe/d of available capacity still out of action, in part as a result of militant attacks.  In 2008, production averaged over 850,000 boe/d.  Notable is that the deal does not include Shell’s deep offshore blocks that are less susceptible to militant attack and have more generous fiscal terms.  Nigeria is home to some of the most accessible oil in the world which is significantly less expensive to develop than fields in both Europe and the United States.  Even if one estimates that the profit per barrel is just 50 cents, Shell is foregoing a profit stream of almost $200 million a year with their withdrawal.

If the world is to meet its growing demand for petroleum products, it must ensure steadily growing and secure supplies of energy.  If this cannot be achieved, damagingly high and volatile prices will return and continue to reduce our economic and national security.  For the sake of our immediate dependence on oil, let us hope that in 2010, supply disruptions are minor and infrequent, and important investment is not withdrawn.

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