Oil industry expects difficult road ahead

LONDON —The oil industry expects a difficult road ahead as it struggles to recover from the global economic downturn and is forced to juggle rising demand from developing countries against requirements for cleaner energy.

Oil executives and analysts meeting in London on Monday said the industry was at a crossroads as it emerges out of a rout that sent crude prices tumbling from a record high of $150 in July 2008 to under $40 a barrel at the peak of the financial turmoil.

BP PLC chief economist Christof Ruehl said consolidation was likely in the refining sector after oil companies reported billion dollar losses at the end of last year amid falling demand.

“To put it bluntly and shortly, there will have to be some consolidation in the global refining industry,” Ruehl said at London’s annual International Petroleum Week.

Ruehl said that lower output from the Organization of the Petroleum Exporting Countries (OPEC) and the global economic recovery would continue to support crude oil prices this year, setting a price floor.

But he was skeptical of a stronger rebound in demand that has been forecast by some commentators, saying that daily consumption growth would remain below the average levels of 1.1 million barrels recorded in the years leading up to the global financial crisis.

He said that prices are likely to hold in recent trading ranges — crude has fluctuated within a relatively tight $15 band between $69 and $84 per barrel since the start of October — as excess capacity keeps them from spiking over the next few years.

Even if demand bounced back stronger than anticipated, spare production capacity would prevent a spike in prices, he added.

“I would expect oil prices to stay in the current range,” he said. “Even if the good years were to return tomorrow it would still take more than three years to burn through spare capacity to get back to a market as tight as it was before the crunch in 2008.”

“I think it’s very unlikely that we will see asset price spikes over the next few years,” he added.

A series of production cuts by OPEC to support prices has resulted in spare capacity of around six million barrels of oil per day.

The annual gathering of the oil industry, organized by the Energy Institute, is a little more subdued this year even though oil companies have begun to pump more petroleum and bring in more profits.

Shell UK Chairman James Smith, hosting the meeting, noted that they emerged from a miserable couple of years.

Thirst for fossil fuels dropped considerably in the developed world during the recession and it hasn’t come close to recovering fully. Throughout most of 2009, storage houses have been crammed with oil and gas.