Credit and Oil: UK Industry Update

Word came Thursday that the UK Offshore Oil and Exploration sector is at risk of collapse. Dow Jones Newswires has the coverage:

Investment and exploration in the U.K. North Sea oil and gas basin could collapse this year because of high costs and a funding drought, said the head of the country’s oil and gas industry lobby Thursday. Investment could have halved within two years and exploration and appraisal of new reserves in 2009 could fall to a third of the 2008 level, Oil and Gas U.K. Chief Executive Malcolm Webb told a special session of the U.K. parliament’s Energy and Climate Change Committee in Aberdeen, Scotland. “Since 2004, costs have doubled and the rate of tax charged on new developments has risen to 50%,” Webb said. “With sources of credit drying up, the amount of capital available has drastically reduced and the falling competitiveness of U.K. projects means investment could halve in the next two years.”

This is not a surprise. Behind the curtain of the global financial crisis, supply-growth of resources from copper to natural gas to oil has been crashing for nine months. Collapsing prices, shortage of credit, and the ensuing behavioral posture towards the future have all combined to produce this outcome. What’s worse, is these conditions will obtain right into the face of any price rise because only a sustained period, of at least a year, will induce free-market producers to make the necessary investments to increase production. Accordingly, until then, the world will simply run down inventories.

Comments

[Ferdinand E...:]

I refereed a paper earlier today in which a teacher of economics ventured into the energy field in order to tell us about the beautiful availability of petroleum (oil and gas) in this old world of ours, discounting at great length the talk about 'peaks' and the like. Present and expected technological improvements provided the foundation of his argument.

For years the (UK) FInancial Times (and a few other publications) have told us about the sizable quantity of energy resources remaining to be exploited in the UK North Sea when the right technology came along. My interpretation of the situation for the last few years has been that the right technology may never come along. Apparently the institutions financing UK energy 'plays' are now ready to accept that the petroleum sector of that country has seen its best days.

Mar 22 10:11 AM

[J. D. Swampfox:]

The sort of information in this article and in Professor Banks comment above leads me to think energy prices will one day explode. It's just hard to judge exactly when to take an investment position...

Mar 22 05:41 PM

[William Dav...:]

Much of the production in the North Sea has comes from extending the life of existing fields when the prices were high. Lets hope price don't stay low too long or else even the current fields life will be greatly shortened and Aberdeen's deep water expertise will go with them. That would make the next oil spike even worse.

Apr 26 07:25 PM