$10 Trillion Required to Avoid Future Bunker Price Spike

OPEC believes $10 trillion needs to be invested in the oil and gas sector through 2040 in order avoid a huge price increase

The Organization of Petroleum Exporting Countries (OPEC) believes $10 trillion needs to be invested in the oil and gas sector through 2040 in order avoid a huge price increase.

Such an increase would cause a inevitable spike in bunker prices, which are intrinsically linked to the cost of crude.

In OPEC's World Oil Outlook for 2015, Abdalla Salem El-Badri, secretary general for OPEC, states that the $10 trillion investment in exploration and production is necessary over the next 24 years to ensure adequate oil supplies. 

He writes that "In the current market environment, what this underlines is the delicate balance between prices, the cost of the marginal barrel and future supplies; this balance is essential in making sure the necessary future investments are made."

El-Badri warns that "If the right signals are not forthcoming, there is the possibility that the market could find that there is not enough new capacity and infrastructure in place to meet future rising demand levels, and this would obviously have a knock-on impact for prices."

This is not the first time El-Badri has warned of the risk of under investment.

In January he argued that cutting production would lead to spare capacity, which would result in producers not wanting to to invest.

"If they do not invest there will be no more supply, if there is no more supply there will be a shortage in the market after three-four years and the price will go up and we'll see a repetition of 2008," he said, referring to the oil price spike in that year.

Recent research by Rystad Energy also suggests that the current low cost, over supplied oil market could be turned around within the next few years, OSJ reports.

The firm says the oil industry needs to replace 34 billion barrels of crude every year, but in 2015 only made investment decisions for around 8 billion barrels - a quarter of what the market needs in the long term.

Jarand Rystad, Managing Partner at Rystad Energy, says oil companies are simply doing everything they can to cut costs.

"As a result, billions of barrels of crude are not being matured while global consumption growth is still very robust. Thus, a new shortage of crude is likely to come a few years down the road," he says.

"When this happens, oil service capacity will not be there to support growth at the pace needed. There is then a risk that we will face a new era of cost inflation which, once again, will drive up the oil price and negatively affect the global economy."

Marginal Costs

While noting that long-term predictions involving the oil sector are notoriously inaccurate, energy and environment journalist Nick Cunningham writes in the December 28 edition of OilPrice that marginal costs, which influence oil prices, have generally been increasing.

At the same time, low-cost production is depleting, with the industry becoming "more reliant on deep-water, shale, or Arctic oil, all of which require higher levels of spending.

"In many cases, these sorts of projects are not profitable at today's prices."

Cunningham, who points out that about $250 billion a year of El-Badri's $10 trillion investment estimate would have to come from non-OPEC countries, concludes that "the price spikes seen in 2011-2014 sowed the seeds of the current bust, but the pullback today could create the conditions of another spike in the future.

"OPEC could be a bit too sanguine with its call for $95 oil in 2040."

As for OPEC's own highly-criticized overproduction, Robin Mills, head of consulting for Manaar Energy, has taken the controversial tack of suggesting that the cartel consider even greater output - a move he says would give Saudi Arabia and other key members several benefits.