Supply crunch may bring $200 a barrel in 5-10 years

The world faces a serious oil supply crunch within five to 10 years that may drive prices up to more than $200 a barrel, a British think tank said on Friday.

The Chatham House report says $200 oil is possible, barring a collapse in demand, because of inadequate investment by oil companies in raising output, not because of a lack of oil underground.

A supply crunch appears likely around 2013, "even allowing for some increase in capacity over the next few years," says the report by Paul Stevens, a senior research fellow at Chatham House.

"The implication is that it will quickly translate into a price spike although there is a question over how strategic stocks might be used to alleviate this," the report adds, concluding that "a spike of over $200 is possible." The report concedes that it uses a "controversial and extremely bullish" forecast of future oil demand and supply.

It assumes Saudi production capacity will remain flat after reaching 12.5 million barrels per day in 2009 and that the capacity of other OPEC countries remains flat after 2008. Oil prices have risen sharply in the last few years, with US crude shooting to a record of more than $147 a barrel in July before easing back to around $120 now.

The report said investment in new oil supplies has been and will be inadequate, partly because international oil companies have incentives to return dividends to shareholders rather than reinvest them. It also cited "resource nationalism" in some producer countries that exclude international oil companies from helping develop production capacity. It also noted that some governments limit investment in their national oil companies.

The report noted that governments in industrialised countries have been reluctant to intervene in energy markets. It said markets alone could not provide sufficient incentives for conservation or to bring more energy on-stream, and that a price spike might break down opposition to intervention.

Stevens told Reuters he favoured greater government intervention, but said it should be "intelligent intervention." "A good example is energy conservation and improved energy efficiency. If you leave that to the market it is simply not going to happen, or is going to happen very, very slowly," he said.

Stevens had mixed feelings about the scenario his report paints. "At one level we should be worried because it means we are going to be running into energy shortages. On the other hand maybe it's a good thing, maybe that's what we need, much higher prices, to actually get people to start doing sensible things about energy," he said.