An Oil Drought Sooner Than Later?

As far as crude oil is concerned, the usual market forces have failed to get triggered at this time. While the growing demand has yielded huge profits for oil companies and their investors worldwide, consumers have become more and more frustrated with rising gas prices. Consumers better get used to it, because higher prices have hardly quenched anyone’s thirst for oil and additional supply failed to materialize.

True, the demand has slowed somewhat in the developed world. But, as we turned toward hybrids and finding new ways to reduce greenhouse-gas emissions, emerging and red-hot economies have more than picked up the slack. If only oil producers did not struggle with declining oil fields and those pesky geopolitical uncertainties.

According to a study conducted by the International Energy Agency (IEA), the demand for crude oil will keep up at a crazy pace for at least the next five years. However, the supply will also keep tightening, and within a much shorter period of time. The IEA estimates that the supply will drop below the “safety margin” within the next three years at the most. The way things are shaping up, the oil market could be headed straight for a drought of somewhat scary proportions.

Now, in terms of future oil price predictions, the IEA is a little vague. However, it does not take a rocket scientist to figure out that since crude is currently trading around $70.00 per barrel, prices are likely to go up rather than down, at least for the next three to six months. The only ray of sunshine is coming from the refineries, which have picked up the pace, so at least price pressures will have eased up from that direction.

Worldwide, the IEA expects the demand for crude and its products in the next five years to increase by an average of 2.2% to 95.8 million barrels per day. Divided by continents, the average annual demand in North America will grow by 1.3%, in Europe by 0.7%, and in emerging economies by a strong 3.6%.

Why is the supply of crude suffering? There are a number of reasons, the least of which is the actual exhaustion of the natural resource. Partly, costs of oil exploration and production have hit the roof, resulting in major project delays. Also, in the most active regions production-wise, governments have started meddling, either contemplating nationalization of natural resources or already implementing it. Then there is the fact that most oil is located in the world’s geopolitical hot spots.

In any event, the oil supply versus demand squeeze is looming. There are high prices as a consequence, and while producers and investors may find themselves on the profit side of the pendulum, consumers are not likely to be very happy in the short term.