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7 Aug, 2009 15:58

Oil braces for tighter longer term

Crude oil is again trading about $72 per barrel after a fourth weekly gain, with the International Energy Agency suggesting falling production may drive prices higher and the world towards another oil crisis.

The International Energy agency estimates that 800 of the world’s largest deposits account for three quarters of global oil reserves – and most of them have passed peak production.

But Jorge Montepeque, Global Director of Market Reporting at Platts believes that if there is sufficient demand, there will always be supply.

“Production is a function of price and profit. If you let true market forces operate there is a way for new supply to always come out, or an alternative to be developed. But the history of the world has been that up to now. The world manages to increase production, almost year on year. “

But oil prices could be several times higher than anything seen before as production at new fields will be far more expensive. The cost of production now in Russia’s West Siberian fields can be as low as $7 dollars per barrel.

As these fields dry up, oil majors are being forced to start working in the more severe conditions of East Siberia. Gennady Shmal, Head of the Oil Producers Union, says this involves much greater outlays, which in turn will drive prices.

“Last year Russia’s oil output dropped by half a percent – the first fall in 15 years. The main reason is lack of investment in development of around $40 billion. East Siberia has great potential in terms of new reserves. Some companies have started production there, but production costs are twice as expensive as in West Siberia, which isn’t the cheapest oil region.”

Experts warn the era of cheap oil is over. Even if recent US government initiatives to limit speculation on the oil market succeed, the price looks set to grow inexorably in the wake of soaring production costs.