Higher Energy Prices Expected as Supply Giants Cut Industry Investment

Many businesses and consumers are enjoying the positive effects of falling oil prices in the UK. At the same time though, many large energy companies, as well as their investors, are cringing at the thought of $50 oil barrels.

Pinched profits and falling share prices have forced industry executives into taking ill-advised investment decisions.

Many commentators as well as industry insiders have warned of the catastrophic consequences that could arise from failing to commit to the long-term viability of the the oil and gas industry. By not investing in new supplies, energy giants risk being unable to meet global demand – and push the world closer into a highly volatile marketplace.

If companies restrict investment in new oil and gas supplies then the energy market will develop a structural turbulence which will be difficult to manage. Prices will rise and consumers will be the ones who suffer most.

Energy cuts have been sharp and fast

The rationale for large firms is relatively simple; risky energy projects like exploratory campaigns which previously might have been commercially viable, now no longer make sense in the age of $50 oil.

This is problematic because oil fields cannot be converted into credible sources overnight. So, energy companies need to be planning their supplies ten years in advance; and not for their share price tomorrow.

Unfortunately, many energy projects are being put on hold as suppliers balk to short term shareholder demands, thus risking long-term strategy and energy security.

Significant job cuts have already been made in places like the North Sea, where dwindling reserves make extraction more expensive. Furthermore, Shell – the Anglo-Dutch energy giant recently announced its plans to slash investment by $15bn over three years.

Such short-termism risks the emergence of even bigger supply shortfalls in the future. There is a real and growing concern that companies are sinking the knife too deeply and too quickly following the OPEC-engineered price re-flooring. Consumers are rightly concerned that they will see the price of crude oil resurface well above the $100 per barrel mark.

Pockets of hope

There are some slivers of hope though. Some companies have shown evidence of forward planning and a commitment to longer term thinking. Shell, the same company that committed to slashing investment by $15bn has also committed to pressing on with its Artic drilling campaign in the summer.

Chief executive Ben van Beurden explained that difficult investment decisions should not be take on short-term factors like reduced oil prices. He urged suppliers not to overreact to increased shareholder pressure by indiscriminately scrapping longer-term projects.

Common sense thinking like this is commendable in what is sometimes a fickle marketplace.