HOUSTON, May 17 — Predicting another oil shock, analysts John Westwood Ltd., Canterbury, England, said depleting oil reserves, coupled with growing energy demand, will result in sustained oil price increases, greater capital investment in natural gas production, drastic conservation regulations, and fevered development of renewable energy substitutes funded by “windfall” profits.

The current $40 oil prices likely will begin sustained rises soon, requiring the massive development of natural gas and renewable energy resources, said the firm’s John Westwood.

China’s rising oil demand, in particular, likely will continue, he said. China has 5 times the US population and is industrializing rapidly, Westwood said. Vehicle growth in China also is expanding apace, increasing global oil demand (see CERA: Impact of China’s energy situation, OGJ Online, May 17, 2004).

“Any growth in global economic activity increases oil demand such that, at 1% demand growth a production peak [will occur] in 2016; at 2% it occurs in 2012; and at 3% it occurs in 2008. The world’s known and estimated yet-to-find reserves and resources cannot satisfy even the present level of production of some 76 million b/d beyond 2020,” Westwood warned.

Oil wanes; prices rise

Supply specialist Michael R. Smith added that, of 99 producing countries 52 are already past their production peak and 16 are at peak. Once a country passes peak production, he said, there is little chance it can reverse its decline. “When this happens to total global oil supply, then growth in demand will be impossible,” Smith said.

“Large capital investments within OPEC countries are already required to rapidly increase production after 2008 by at least an additional 1-2 million b/d every year to offset declines elsewhere,” he warned. If such output is not achieved as fast as required, the world will then see sustained growth in oil prices, Smith said.

Once oil supplies approach peak and scarcity prevails, prices will double within 3-4 years, just as they did during the oil shocks of the 1970s until oil demand falls significantly, Smith said.

“Drastic conservation will make prices fluctuate as they did in the oil shocks, always settling at a higher level,” Smith said. A new stable energy mix might ultimately be achieved with substitute fuels, but it is uncertain how long that would take. “Meanwhile producers will face steadily increasing government, environmental, and conservation regulations,” Smith said.

“Windfall profits arising from energy price surges, which traditionally have funded new oil and gas investment, will have to be, at least partly, employed in bringing other forms of energy to profitability.”

Gas, renewables boom

“Global production of natural gas, currently some 2,600 billion cu m, is expected to grow to 4,755 billion cu m/year by 2025,” an average increase of 2.75%/year at a cost of $25-40 billion/year, he said. Smith forecast that more than $39 billion will be spent during the next 5 years on LNG facilities.

“The future driver for renewable energy will not be global warming, but security of supply,” said Westwood, who forecasts major investment increases in all renewable energy sources, particularly windpower and biomass, to offset soaring conventional energy prices.