Global oil infrastructure is inadequate across the supply chain from production fields to transport, a business event in Aberdeen will hear this morning.
Thorsten Fischer, senior economic adviser at the Royal Bank of Scotland, will say that underinvestment during the credit crunch, when borrowing was tight and expensive, contributed to the problem.
He says: “Many projects in high-cost environments have been delayed or cancelled, but it is precisely these projects that will balance demand and supply during times of rapid economic expansion.
“In the absence of these marginal projects, prices will have to shoot up more sharply to bring demand and supply into balance.
“The global oil industry remains hobbled by the dominance of state-owned national oil companies, and many barriers to trade and investment means that investment levels will remain below the level of a competitive industry even after the rebound.
“In the short term, this means increased price volatility as the infrastructure limits the market’s ability to smooth excess demand or supply, but longer term it holds the potential for price spikes once the economy fully recovers.”
Mr Fischer is one of the speakers at an Oil and Gas UK breakfast briefing in the Beach Ballroom, which will give an insight into the challenges that Britain’s supply chain has faced during the economic downturn.
The senior economic adviser will say that the global economic outlook will determine where the crude oil price is headed next.
He adds: “Some observers have argued that record high oil prices contributed to the recession. We are sceptical.
“In our view, high commodity prices were a symptom of the credit boom as easy liquidity and fears about dollar weakness and inflation combined with very favourable demand projections increased crude oil’s attractiveness as an asset class and inflation hedge. The recession started when the credit bubble burst, and crude oil prices fell as a result.”
Mr Fischer is maintaining a baseline forecast for crude oil prices to stay in a range of $65-$75 a barrel.
He says: “Risks are skewed to the downside while the global economy remains in recession or shows sub-par growth, but the balance shifts toward the upside during 2010 when the recovery is firmly entrenched.
“The withdrawal of stimulus will be the most important theme for commodities.
“If central banks mop up excess liquidity and tighten monetary policy early during the recovery, crude oil will feel the full impact of such a policy.
“Monetary tightening will curb physical demand by slowing economic growth and increasing the cost of storage and will reduce investment demand by reducing fears of inflationary pressures, increasing the opportunity costs of investing in commodities and dampening future expectations for economic growth.
“Under this scenario, prices will have a hard time breaking the $75 barrier.”
“The opposite approach would make investment in commodities very attractive and would increase the price of all commodities, including crude oil, significantly. If central banks lack the credibility to act sooner rather than later during the recovery, heightened inflation fears and expectations for a strong rebound would support crude oil prices, which could again reach triple digits under this scenario.”
US crude for November delivery settled up 47 cents at $70.88 a barrel yesterday.
Oil prices had risen earlier to a two-week high of $71.97 a barrel, but pared gains as the dollar recovered some of its earlier losses in afternoon trade. London Brent crude was up 52 cents at $68.56.