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Why Oil Is Still Underpriced

Oil prices are pulled in…

Darrell Delamaide

Darrell Delamaide

Darrell Delamaide is a writer, editor and journalist with more than 30 years' experience. He is the author of three books and has written for…

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Lloyd’s Research Paper Warns of Peak Oil Crunch

The Lloyd’s insurance market in London added its voice to those warning about dependence on oil with the release of a research paper that predicted a supply crunch and price spike for oil in the medium term.

“An oil supply crunch in the medium term is likely to be due to a combination of insufficient investment in upstream oil and efficiency over the last two decades and rebounding demand following the global recession,” said Antony Froggatt and Glada Lahn, researchers at the Chatham House think tank in London, who produced the report for Lloyd’s.

The influence of new emission regulations and concern about global warming will render traditional pricing mechanisms unable to balance supply and demand of traditional fuel resources, the authors said. Surging demand in countries like India and China combined with the increasingly difficult environments for recovering oil such as deepwater drilling and oil sands will make prices increasingly volatile, they said.

Researcher Frogatt acknowledges that this new variation of the peak oil theory could meet with skepticism. “While some dismiss the warnings of impending oil crunch and a global conventional energy deficit as alarmist and point to past predictions of resource constraints failing to materialise, growth in the demand for energy in developing countries is key and indisputable,” he commented.

The Lloyd’s study concludes that “businesses which prepare for and take advantage of the new energy reality will prosper,” while failure to do so could be “catastrophic.”

The lack of any new global accord on climate change is creating uncertainty for business, which is holding back investment, the study said. Businesses must take steps on their own to manage increasing energy costs and carbon exposure by reducing fossil fuel consumption.

Businesses must plan on possible disruptions in energy resources and their impact on the supply chain. Some food products, for instance, may become unprofitable without a steady supply of low-cost energy, given their tight profit margins. Retail businesses may have to re-think “just-in-time” models as energy becomes less reliable.

But the energy revolution also presents new opportunities, the study said. “Investment in renewable energy and ‘intelligent’ infrastructure is booming,” the authors said.

By. Darrell Delamaide for OilPrice.com




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