IEA: Slashed spending by drillers could lead to price spike

PARIS (AP) – Global oil supply growth is plunging as drillers slash capital expenditures severely, Europe’s energy policy group said Monday, which has the potential to end in an energy shock.

Reduced spending by energy companies will lead to a more balanced market in 2017, but “investment cuts pose supply security risks down the road,” according to a Monday report from the International Energy Agency.

The resumption of drilling is not immediate when sites are taken off line. The IEA is referring to a period in which demand for energy returns, but there is not enough drilling activity to satisfy that demand.

Last week, the number of rigs exploring for oil and natural gas in the U.S. declined by declined by 30, to 541, according to oilfield services company Baker Hughes. That is nearing the all-time modern low of 488, recorded 17 years ago.

“It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not-too-distant-future,” said IEA Executive Director Fatih Birol.

The price of U.S. crude jumped 5 percent Monday.

Capital expenditure by energy companies fell 24 percent last year and is expected to drop another 17 percent this year, the IEA said – the first two-year decline since 1986.

The decline of energy has been a huge boon for most Americans who spend hundreds less on gas each year.

Oil prices have tumbled 70 percent since mid-2014, and gasoline prices have followed.

The U.S. Energy Information Agency expects an average price of $1.98 per gallon nationwide this year. The last time oil averaged less than $2 for a full year was 2004.

But the impact has already had devastating effects on communities that rely on the oil and gas industry.

Home sales fell sharply this year in North Dakota and the West Texas cities of Midland and Odessa. Home sales have also slowed in El Paso, and, more recently, in Houston.

The IEA now projects 4.1 million barrels a day being added to global oil supply between 2015 and 2021, down sharply from the total growth of 11 million barrels a day between 2009 and 2015.

A year ago, the Paris organization of 29 major oil importing nations had forecast a “relatively swift” recovery. But the decline has continued, with the price for a barrel of oil dipping below $30 in recent weeks, levels last seen in 2003.

Birol cited the extraordinary volatility in oil markets, which have made forecasts “more difficult than ever,” for the changing outlook.

A barrel of U.S. oil traded for around $33.45 in midday trading Monday.