The oil supply crunch is coming….

For those who thought the oil price was on a steady downward spiral after its recent highs, it is time to think again.

Prices have risen again as the conflict between Russia and Georgia raised concerns that Caspian supplies, especially through the Baku-Tblisi-Ceyhan pipeline, may be disrupted. But forget any short-term fluctuations, the big crunch could just be around the corner. And it has nothing to do with peak oil.

One of the questions that analysts have been asking over the last few years as the oil majors have raked in record profits, is why have they not invested more in finding reserves of oil or gas, or even in renewables rather than put it in the bank or give it back to their shareholders.

Now Chatham House, the influential British think-tank, argues that because of inadequate investment by both international and national oil companies, there will be a serious oil supply crunch, which could see the price of oil spiral to over $200 in the next few years. This spike could “have serious policy implications with long-lasting effects on the global energy picture”.

As the report notes: “Most conventional forecasts expect a very large increase in the production of liquid fuels. However, these forecasts simply assume this will be forthcoming.” Not so. It argues that, although the oil may be there, “below-ground oil resources will not be converted into producing capacity”. The only event that will stop this happening is a collapse in the demand for oil and this is unlikely.

The Chatham House report author, Paul Stevens, who is himself a consultant to the oil industry and governments, argues that more government intervention into the market may be the answer. “Governments must intervene to a much greater extent than they have so far been willing to do this Century”, he argues.

Although the history of government intervention in the energy markets is not a good one, the combined risk of catastrophic climate change, and a forth-coming energy crunch should be enough for a radical energy plan. It should include not facilitating getting oil out of the ground, but keeping it there. Plain and simple.