– Oil Crisis...is the world about to be shocked

Oil experts see supply crisis in five years
By David Litterick in Chicago

The International Energy Agency has predicted a supply crunch in the world's oil markets that could send prices soaring and place a severe dent in global growth.

In a report that painted a bleak outlook for the global economy, the IEA said spare capacity in oil production would dry up over the next five years, even as demand continues to jump significantly.

"Oil and gas price pressures look set to remain in the coming years," the report said. "Slower-than-expected GDP growth may provide a breathing space, but it is abundantly clear that if the path of demand does not change on its own, it may well be driven to change by higher prices."

The gloomy prognosis puts consumers on warning for higher petrol prices at the pump, soaring utility bills and increased food prices as suppliers bear additional costs for bringing goods to market.

The price of oil is already closing in on record levels above $75 a barrel amid geo-political tensions, and shows no sign of declining.

"Despite four years of high oil prices, this report sees increasing market tightness beyond 2010," the IEA said. "It is possible that the supply crunch could be deferred, but not by much."

The IEA, which acts as an energy watchdog for industrialized nations, said Opec would be unable to increase production in line with demand, while the rate of growth in supplies of oil from other producing nations is also set to slow.

In addition, the gas market will face a supply crunch of its own at the turn of the decade, limiting governments' ability to turn to different sources of fuel. Although the production of biofuels is set to double over the next few years, it will remain a marginal source of energy, the IEA said.

Lawrence Eagles, head of the IEA's oil industry and markets division, said: "The results of our analysis are quite strong. Either we need to have more supplies coming on stream or we need to have lower demand growth."

But with forecasts of world economic growth of 4.5pc a year, the report argued that oil demand was likely to soar to 95.8m barrels a day in 2012 from 81.6m barrels this year.

At the same time it predicted production from the international oil cartel Opec would fall, slipping by 2m barrels a day in 2009, and it also cut supply forecasts for non-Opec countries by 800,000 barrels.

Some analysts say the agency is being alarmist and that its warnings about supplies are actually leading to higher prices. They claim that the world economy has changed so much since the oil crises of the 1970s that companies and consumers are better able to deal with high oil prices.

However, Mr Eagles said: "The simple thing is we are there to project the market as we see it. The price response is due to fundamentals. We are simply pointing out the fundamentals - that's our job."

The IEA has also given warning about the effect of "energy nationalism", as governments use high oil prices to strengthen their control of domestic production. It said that could result in less investment than was necessary, for instance in Russia and Venezuela.

The agency also pointed to the "curious contrast" between higher cash return to energy company shareholders and "essentially unchanged exploration and production efforts". While refining capacity would improve, the Paris-based organization predicted, it too would grow slower than had been anticipated.