Oil company cutbacks may raise gas prices down the road

Americans battered by the recession have found modest consolation in low gasoline prices, a salve that’s likely to last as long as the economic downturn.

But the oil industry is quietly sowing the seeds for a sharp run-up in gas prices once demand recovers.


Oil companies are slashing new investment and production far more sharply than analysts projected just a couple of months ago, a strategy analysts say could lead to shortages and higher gas prices when consumption rebounds. And, analysts say, a standoff between the oil giants and their suppliers over the cost of rigs, labor and other expenses could prolong the investment slowdown.

“The turnaround will probably come faster than people expect, and the supply won’t be there,” says Joseph Stanislaw, an adviser to Deloitte’s energy practice.

Oil companies are shaving exploration and production spending 18% this year, including a 40% drop in the U.S., according to new estimates by analyst James Crandall of Barclays Capital. In December, the firm said budgets would fall 12%, 26% in the U.S. Drilling in the U.S. is down 39% from its September peak.

Dozens of projects have been put off, including oil fields from West Texas to Russia and oil-sands initiatives in Canada.

The precipitous drop in oil prices has curtailed the companies’ cash flow, leaving less to invest in new wells. Oil prices have plunged 70% since hitting a record $147 in July. Crude closed at $40.15 Monday after sinking as low as $33.98 last month.

USA Today