Business leaders warn of impending oil crunch

Richard Branson and other business leaders will warn this week that the world is hurtling towards an "oil crunch" to match the financial crisis within five years.

In a report due to be launched on Wednesday, the Virgin Group founder will say that the world is running out of oil and that the coming challenges may be more serious than the credit crunch.

Branson - whose airline and rail businesses are sensitive to volatility in the cost of crude - has joined other company chiefs in warning of price spikes and shortages in the near future without drastic action.

"The next five years will see us face another crunch - the oil crunch," the report said. "This time, we do have the chance to prepare. The challenge is to use that time well."

The report is compiled by the Industry Taskforce for Peak Oil and Energy Security, a group of private British companies whose members include Branson, Brian Souter, chief executive of Stagecoach, Scottish & Southern Energy boss Ian Marchant and Philip Dilley, chairman of consultancy firm Arup.

The group said the UK economy is particularly dependent on oil - from transportation to retail - and urged any new Government to produce a coherent set of policies to enable the country to adapt to a future of high cost oil.

"Our message to government and businesses is clear. Act now," the group said.

"If we don't, we run the risk of a return to the oil price shocks of the 1970s with all the inherent uncertainty and trauma that brought.

"Don't let the oil crunch catch us out in the way that the credit crunch did."

It said fuel shortages could lead to shortages in consumer products, while the UK's energy security "will be significantly compromised" and the impact of climate change makes the challenge all the more urgent.

Oil price shocks could also "destabilise economic, political and social activity" and have the potential to hit the most disadvantaged in society hardest.

The report comes amid general fears about future energy security and costs in the UK.

A recent report by energy watchdog Ofgem warned that electricity and gas may become unaffordable for an increasing number of households unless drastic action is taken to secure power supplies.

Oil prices have been particularly volatile in recent years, spiking at $147 a barrel in July 2008 before plummeting to $32 a barrel that December amid the financial crisis and onset of the economic downturn.

The price climbed again to around $70 to $80 late last year and has stayed relatively static as many world economies remain under pressure.

Chris Skrebowski, an independent oil consultant who prepared part of the report, said the recession has pushed the "oil crunch" point - when global demand will use up stocks faster than they can be replaced by new production - back by two years and given governments and firms more time to work out how to act.

This is because shrinking economic output has suppressed demand and therefore allowed prices to stay relatively low.

But he warned spare capacity built up by oil cartel Opec could be run down as early as 2012/13 and no later than 2014/15, which in turn is expected to cause oil price spikes "imperilling economic growth".

Mr Skrebowski said the UK is particularly vulnerable to these changes as it increasingly relies on imports of oil, gas and coal.

"The insulation from international supply is now eroding quite quickly," he said.

"This is likely to put pressure on the UK balance of payments and in a world of floating exchange rates is likely to put downward pressure on the valuation of the pound sterling."

He said while supply is relatively predictable over the next six years because of the slow-moving nature of major projects, demand is more difficult to gauge as it depends on recovery from recession.

Future usage is also shifting to the world's less developed economies - like China and India - which together are expected to account for 80% to 90% of demand, but which have less reliable consumption data.

The report, which is released in full on Wednesday, warns one downside of the recession is that with prices low, companies will not have the financial incentive to invest in new oil fields.

It predicts that while it is possible for profits to be made at the current level of around $70 a barrel, the price would have to be between $100 and $120 to motivate investment.

"The challenge is that if oil prices reach the levels necessary to justify these high cost investments, economic growth may be imperilled," it said.

The report continued: "What the events of 2008 brutally demonstrated was that if oil prices move too high too quickly the only economic adaptation is recession."

Differences on the oil outlook emerged at the recent world economic forum at Davos.

Khalid Al Falih, chief executive of Saudi Aramco, reassured delegates that fears over dwindling energy supplies are overstated,

"There are plenty of resources out there," he said.

"We don't believe in peak oil, not in the foreseeable future."

But Total chairman Thierry Desmarest said it will be difficult to increase global output beyond 95 million barrels a day of oil in the near future, up from about 85 million barrels a day currently estimated by the U.S. Energy Information Administration.

Meanwhile BP boss Tony Hayward said the potential supplies locked in Iraq would become increasingly significant.

He said that Baghdad can boost oil output to 10 million barrels a day in a decade, from last year's average of 1.9 million barrels, making an "important contribution" to filling gaps in global supply.

The full Industry Taskforce for Peak Oil and Energy Security report, which also discusses whether gas could step in to replace some of the shortfall, will include recommendations and further predictions of the impact on the UK economy.

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