As the price of a barrel of crude oil heads for the $100 threshold, and will soon exceed the real dollar all-time record value reached in 1980,* the annual Oil & Money Conference was told in  London on Monday, that shortages of skilled labour and long-term under-investment mean oil supplies are unlikely to meet the expected growth in demand over the coming years.

Nobuo Tanaka, the Executive Director of the International Energy Agency (IEA), the energy adviser to 26 industrialised countries, including Ireland told the conference: “Despite five years of high oil prices, market tightness will actually increase from 2009. New capacity additions will not keep up with declines at current fields and the projected increase in demand.”

He said that the IEA had revised up sharply to $5,000bn its estimate of the investment that the world’s energy industries would need by 2030 to meet rising demand. That is a 16% increase on last year’s estimate of $4,300bn. The IEA's annual World Energy Outlook, which will focus on soaring demand for energy in China and India, will be published next week.

IEA analysts say that a sufficient resource base exists to supply demand through 2030, but Tanaka said he isn't confident there will be enough investment, skilled workers and technology to actually get to that oil "in a timely manner."

Andrew Gould, the Chairman and Chief Executive of Schlumberger Ltd., an oil-services company, said that 70% of the oil fields currently in operation are 30 years old. The growth in global demand since 2003, he said, has been roughly the equivalent of the daily output from two of the world's larger suppliers: the North Sea and Mexico.

Gould said that a 1.7% annual energy demand increase translates to the need for 11 million barrels per day extra oil by 2010.

Shortages of skilled staff and equipment such as drilling rigs have fuelled a steep rise in costs worldwide.

Matthew Simmons of Simmons, a US specialist energy investment bank, said 30,000 or more new staff would be needed to operate rigs now under construction. He said staff costs were rising at an average of 8% a year and by as much as 25% for some skilled staff areas.

Sadad I. Al-Husseini, an oil consultant and former Executive Vice President at Saudi Aramco, the kingdom's national oil company, warned that the major oil-producing nations are inflating their oil reserves by as much as 300 billion barrels. These amount to hypothetical reserves that are "not delineated, not accessible and not available for production."

Much of the production in the Middle East is from mature reservoirs, and the giant fields of the Arabian Gulf region, he said, are 41% depleted.

Global oil and gas capacity is constrained by mature reservoirs and is facing a "15-year production plateau," Al-Husseini said. He forecast that supply shortages will continue to add $12 to the price of oil for every million barrels a day in additional demand. Global demand, now at some 85 million barrels a day, was on average 10 million barrels a day lower in 1999.

Taking Andrew Gould's forecast increase of daily demand wiith Sadad Al-Husseini's estimate of an additional $12 per 1 million barrels, it's not good news for central bankers, business and consumers. Oil prices have jumped nearly 40% since early summer.

Coupled with the decline of the so-called China effect on world inflation, and the rise in food inflation, the days of a US Federal funds rate at 1% or a European Central Bank key interest rate of 2% are likely to be looked back in wonder.

Presentations from the Oil & Money Conference are available for download.

BP Statistical Review of World Energy 2007: World has enough oil for forty years; Growth in emissions from fossil fuels tripled to annual average of 3.4% in 2001-06

*The US federal government says prices still haven't exceeded the January 1981 inflation-adjusted record of $93.09. The Paris-based International Energy Agency says the actual record was in the previous spring and is $101.70 in today's dollars.

The US Energy Information Administration of the Department of Energy: Defining Records

With oil prices recently reaching new nominal highs, some are interested in knowing how current prices for crude oil stand in relation to all-time record prices on an inflation-adjusted basis. A wide variety of measurements suggests that “record” inflation-adjusted prices for crude oil occurred in the early 1980s. However, there are two major issues when trying to arrive at an inflation-adjusted record crude oil price: 1) what historical price you use for crude oil, and 2) the price index used to adjust for inflation.

The absence of a transparent global crude oil spot market in the early 1980s makes it difficult to choose a specific nominal price from that era for use as the basis for calculating inflation-adjusted prices for purposes of comparison with current spot prices. For example, the posted price for West Texas Intermediate (WTI) crude oil that the International Energy Agency (IEA) used in its calculations to show that the record inflation-adjusted price occurred in April 1980 changed only infrequently, and, in fact, is reported as being the same price in April, May, June, and July 1980! Because the WTI market is much different now than it was in the early 1980s, EIA focuses on a different measure of oil prices, the Imported Refiner Acquisition Cost (IRAC), which is the average price refiners pay for imported oil in a given month. Since the United States imports significant volumes of many different types of crude oil from many different countries, EIA views the IRAC price as a fairly representative measure of world crude oil prices based on actual transactions. Since we have a monthly time series for this going back to the early 1970s, it presents a more consistent comparison over a period of many years. The problem with using the IRAC price is that it is not a widely known crude oil price series, and that IRAC prices are not reported in the media on a daily basis, making them less tangible for many analysts.

The other significant issue is which price index to use in adjusting historical prices to today’s dollars. There are 3 common price indexes that are used to adjust for inflation. They are: 1) the Gross Domestic Product (GDP) deflator, 2) the Consumer Price Index (CPI), and 3) the Personal Consumption Expenditure (PCE) price index. The 3 indices show quite different behavior over the past 30 years, so a calculation of inflation-adjusted prices will be sensitive to which index is used. A general rule of thumb has been to use the GDP deflator to compute real costs for business output and the CPI or PCE for real costs for consumers. This would imply that the GDP deflator should be used for crude oil prices. However, EIA initially adjusted oil prices for inflation for retail gasoline and diesel prices, and, therefore, used the CPI, because at the time, the PCE price index was not available on a monthly basis. When we later began calculating an inflation-adjusted price for crude oil, we just used the price index we were using at the time, the CPI, for consistency’s sake. A case could be argued for using any of the three price measures, with no real strong right or wrong answer. While the GDP deflator may make the most sense, it is not currently published on a monthly basis, making it more difficult to use in our analysis of the recent price increases.

The bottom line that a simple question often has a complex answer. Given changes in oil markets over time, there is no single correct way to determine the inflation-adjusted record price of crude oil. And frankly, while the media often focuses on whether or not a record has been set, an argument could easily be made that the best gauge in determining record prices might be the percentage of household income spent on petroleum products. Notwithstanding the challenges in calculating inflation-adjusted oil prices, almost everyone, with the possible exception of some oil suppliers, agrees that current oil prices are very high.