The problem will come "not because of below-ground resource constraints but because of inadequate investment by international oil companies and national oil companies," argues Professor Paul Stevens, senior research fellow for energy at Chatham House, Britain's top think tank on international affairs.

He blames both the IOCs, such as ExxonMobil and Shell, and the far more powerful (because they control the bulk of known oil reserves) state-owned NOCs, such as Saudi Arabia's Aramco, Mexico's Pemex, Venezuela's PDVSA and so on.

"The willingness of the IOCs to invest is constrained by the adoption of 'value-based management' as a financial strategy. Thus they are returning investment funds to shareholders rather than investing in the industry. For the NOCs, willingness is driven by depletion policy. Increasingly, this is motivated by a view that oil in the ground is worth more than money in the bank," Stevens maintains.

"Many producer countries are also experiencing a resurgence of resource nationalism, which excludes IOCs from helping to develop capacity," Stevens writes. "In some cases, the structure of the oil sector militates against its ability to develop the country's reserves. Finally, in many cases, rising domestic oil consumption is eating into the ability to export."

Domestic oil consumption by the main oil producers has been rising fast, at close to 4 percent a year in the Middle East, while developed countries were increasing their consumption by one-tenth as much. Saudi Arabia's consumption grew at 4.6 percent a year in that period.

Stevens suggests the IOCs became, in a way, victims of market forces. At times of low prices, they saw little benefit in investing in exploration, and in boom times, the logic of the market pressured them to give money back to their shareholders.

He points out that in 2005 the six largest IOCs invested $54 billion in exploring, drilling, improving their skills and technology and so on, but returned far more -- $71 billion -- to their shareholders. This was done in line with the prevailing fashion in management theory that the performance of a company (and its share price) is measured by the returns to shareholders.

The IOCs, like ExxonMobil, Shell, BP and Total, were behaving rationally. They have been increasingly squeezed out of access to most of the world's low-cost oil-producing areas by the NOCs, and the low oil price of the 1990s was a disincentive to invest heavily in exploring for new supplies. At the same time, the industry slashed costs; more than a million employees were let go over the past two decades. Universities then cut back on the production of oil engineering graduates, and the shortages of skilled labor are now biting hard.

Stevens argues that the constraints on skilled manpower and engineering capacity are so strong, he sees little prospect of the Organization of Petroleum Exporting Countries reaching its announced goal of investing $160 billion between now and 2012.

"Even Saudi Arabia, whose record on capacity expansion plans has been superb, is facing questions over its ability to deliver," he notes. "The Khursaniyah expansion, which was due on-stream at the end of 2007, is now expected in mid-2009. Furthermore, there have been 'widespread reports of delays on start-up targets for the majority of its upstream program.'"

Stevens, author of the Chatham House report "The Coming Oil Supply Crunch," has just retired after 15 years as professor of petroleum policy and economics at the Center for Energy, Petroleum and Mineral Law and Policy, based at the University of Dundee in Scotland. (The professorship was created by BP.)

Other factors were important in forcing up prices, including political uncertainties and diminished production in Nigeria, Iraq and Venezuela, and, above all, the surging demand from emergent economies like China and India. But, Stevens notes, the role of China can be overstated. Between 1996 and 2004, when China's consumption of oil grew 3.4 million barrels a day and India's consumption grew by 1 million barrels a day, consumption in the United States grew by 3 million barrels a day.

Whereas in the 1970s the limits placed on OPEC production were more than compensated by the development of new energy resources in non-OPEC areas like the North Sea, Russia and Alaska, non-OPEC production these days is either stagnant or in decline, and not delivering the expected level of supplies.

"Part of the reason for this poor performance is that the natural decline rates in the OECD (Organization for Economic Cooperation and Development) fields have taken analysts by surprise," Stevens notes. "Furthermore, in many of the deepwater fields, where much of the new non-OPEC capacity is coming on-stream, maintaining production is difficult because operations such as in-fill drilling are much more complicated and far more expensive than in traditional oil fields."

Stevens, whose advice is taken very seriously by the British government and by several major oil corporations for whom he is a consultant, recommends that to avoid the threatened oil supply crunch, "energy policy needs to reduce the demand growth of liquid fuels, to increase the supply of conventional liquids or to increase the supply of unconventional liquids."

He proposes the Western governments and enterprises should be prepared to improve the investment climate for sovereign wealth funds and also seek to bring OPEC into the International Energy Agency's emergency sharing scheme.

But he concludes that "only extreme policy measures could achieve a speedy response -- and these are usually politically unpopular. Any major price spike would carry a macro-economic impact which would of itself provoke a policy reaction." At the same time, an oil price spike "might break down opposition to a much greater interventionist approach by governments in their energy sectors. Thus it might do for energy policy what 9/11 did for U.S. military and security policy."

That sounds like a very double-edged sword.

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