True North_

It's the Oil Price, Stupid!

High oil prices were a factor in the economic debacle of 2008 - but only one of several. There was a confluence of events that drove what occurred - I doubt that the extra $1.2 trillion in cost was sufficient, of itself, to cause the collapse that did occur. It contributed, but was not the sole or even most important issue.

It's also not clear to me that the oil price run-up in 2008 was related to supply / demand issues (the quote from the article: "...the price run-up of 2007-08 was caused by strong demand confronting stagnating world production"): in fact, if anything, the collapse in price suggested the opposite (which is that it was largely driven by financial investment in the commodity and the price collapsed when other factors drove the financial players out of the market in August/ September/ October last year). Demand in the US (the bellweather for the oil market) started to drop in late 2007 - as Americans increasingly parked their cars.

As for the cancellation / delay of oil projects, Mmmark's comment above (that $50 oil isn't sufficient to justify investment in replacement supplies, also needs careful consideration. First, most the projects were delayed or "cancelled" when prices hit the $35 mark, and seemed poised potentially to drop lower. Expanding your investment in an environment where oil prices are dropping is tough to justify to shareholders. Second, the credit markets were frozen. The small to medium players had no access to capital (indeed, entirely worthwhile projects collapsed because alternative funding could not be found - for example, Oilexco's North Sea project). Investment was impossible (and continues to be difficult). The larger players also saw their cost of capital rise, and saw no rush to develop or aggressively pursue their projects.

Things appear to be loosening a bit now, as credit markets become more accessible and oil prices stabilize - Imperial Oil just announced that it is proceeding with its major oil sands development in Alberta (the Kearl project - projected to produce about 100,000 bbls/day). Ironically, it was the downturn in the investment environment that helped push the decision - the overheated Alberta labour market has essentially collapsed, and Imperial Oil has managed to reduce its overall costs on the project by at least C$1 billion. I expect other projects will similarly be brought back online over the next few months.