Prominent energy investment banker, Matt Simmons, President of Houston-based energy investment banking firm Simmons & Co., and author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, recently stated that the global financial crisis and collapse of oil prices have stalled investment in oil exploration and production, which could soon lead to shortages and sharp spikes in the price of oil.
Simmons argues that the underlying rate of decline in the world's aging "elephant" oil fields is as much as 20% a year and that much more investment in drilling and exploration is necessary to offset the decline. He does not add that all the recent discoveries are very small relative to these major fields that have supplied us for the past 50 years, and that, while we were producing much more oil than we used 50 years ago, in that we were using, in the U.S. only 5 million barrels a day in the 50s, while the really large discoveries were still being made. Now, we are using 20 million barrels a day, and world wide demand is increasing, while the largest fields are in steep decline and new discoveries are relative small, usually about 5 to 15 billion barrels potential at the most.
Yet drilling and other investments are likely to remain stalled as long as oil is below $70 a barrel. We're ignoring the overhanging energy crunch because the sharp decrease in demand, due to a steep contraction in the global economy, has dampened demand. However, developing countries such as China are rapidly expanding their demand. China is taking advantage of their solid financial posture and everyone else's extreme weakness to get a lock on a major portion of the world's oil production for the future.
The current financial crises has pushed the energy situation off the radar, but, thanks in no small part to the weakness of our currency, oil is now beginning to ratchet back up. Simmons predicts that we could be seeing price spikes "3, 6, no more than 9 months" from now, and it looks like oil is on track to hit $70 a barrel by the end of summer, if current price action is any indication.