As oil prices have been hovering near record levels, oil company executives have been running their businesses as if prices will sink.
When the companies look around the world to determine where to spend money on new oil and natural gas projects, many are assuming prices for a barrel of oil will be in the low- to mid-$20s in future years, a far cry from the current $50 a barrel. They are plunking down cash conservatively, showing little interest in projects that would meet profit goals only when oil prices are high.
This behavior reflects an industry that has weathered a history of profitable booms and wrenching busts. The cautious approach to investing causes world energy officials to worry that exploration and development for oil and natural gas will not keep pace with demand.
The International Energy Agency, which represents 26 industrialized countries, thinks that international oil companies and countries' national oil companies need to invest about $200 billion a year to keep up with demand but are falling 15 percent to 17 percent short.
"There is not enough exploration worldwide," said Claude Mandil, head of the Paris-based energy agency. "There may be a problem in five years."
While capital spending on oil and gas is forecast to increase slightly in dollar value this year, it has not gone up in proportion to companies' increasing cash flow, according to the consulting firm John S. Herold Inc. of Norwalk, Conn.
"Cash is now pouring in, but so far reinvestment has not risen at nearly the pace witnessed in prior oil and gas bull markets," according to a recent Herold report. "Companies appear to be investing relatively cautiously and seeking to maintain capital discipline."
Herold estimates that the five largest oil companies -- BP PLC, Total SA, Chevron Texaco Corp., Exxon Mobil Corp. and Royal Dutch/Shell Group -- will spend nearly $65 billion on capital costs this year. That would be the lowest spending as a percentage of cash flow -- 54 percent -- in the past four years that Herold analyzed. Some of the increases in spending this year are a result of exploration and development cost inflation, not because of more activity, analysts said.
As a result of limited investment, the world's ability to refine oil has not increased significantly in the past two decades, and there are far fewer rigs drilling for oil now compared with the early 1980s, when there was a flurry of activity, analysts said.
Many large oil companies are returning money earned from high oil prices to investors in dividend payments and are buying back stock. Some also are paying down debt. Wall Street has been rewarding the companies' behavior, and stock analysts have applauded the companies' approach.
Some analysts expect capital spending to increase slightly next year.
John C. Felmy, the chief economist for the American Petroleum Institute, a Washington trade association for the industry, said that companies are investing significantly in exploration and development. He said companies need to show restraint, however, given the cyclical nature of the oil business.
"Look back five years," Felmy said. "We had $11 oil. You have to be prudent with your investments."
New investment is most urgently needed in the Middle East, where much of the world's reserves are located, said Fatih Birol, the chief economist for the International Energy Agency. But much of that oil is off-limits to foreign investment, and he said it is unclear whether countries' national oil companies can come up with enough cash to fund investment. "We can find enough oil," Birol said. "The questions is whether or not oil can find money."
Some countries have been using their national oil companies' profits to fund domestic priorities instead of investing heavily in new development. And some national companies have been reluctant to invest significantly, waiting to see whether oil prices retreat.
Without adjustment for inflation, oil prices have hit record highs as demand has been increasing and suppliers are pumping oil at near capacity. Oil markets are concerned that if a significant supply disruption occurs, the world will not be able to pick up the slack elsewhere because production is so close to capacity. Though they have eased in recent days, oil prices are up about 70 percent since a year ago. U.S. benchmark crude oil for December delivery closed at $49.62 yesterday on the New York Mercantile Exchange.
While providing spare capacity to pump more oil from the ground would help drive down oil prices -- and possibly avert worldwide economic problems -- it could be perilous for oil companies.
National and international companies are worried that prices could fall substantially and make their investments less profitable, analysts said. That was the experience in previous years, when oil producers expanded during booms only to be surprised by lower-than-expected demand that followed.
Investing in new capacity would not bring down today's oil prices. Projects can take five to 10 years before they are completed. Mandil is worried about whether too little investment will lead to a tight market in that time frame.
When oil companies determine where to invest and how much to spend, they rely on forecasts of oil prices to determine how profitable their ventures will be when they come online. Analysts are offering mixed forecasts of prices over the next five to 10 years, and companies say they have to act cautiously.
BP's chief executive, John P. Browne, said last week that he thinks oil prices will remain around $30 a barrel in the "medium term," roughly three to five years.
But oil companies are investing as if prices will be lower than that in the next five to 10 years, analysts said, and are planning investments for oil costs in the $20 to $25 range. Most companies will not discuss their projections.
A spokeswoman for Occidental Petroleum Corp. of Los Angeles, an oil and natural gas producer with core operations in the United States, Latin America and the Middle East, said the company looks to past oil prices for guidance.
"We plan our investments on historical oil price averages," said spokeswoman Jan Sieving. "Over the last 10 years it's been $25."
Mike R. Bowlin, the former chief executive of oil company Atlantic Richfield Co., which merged with BP in 2000, said oil price forecasts are notoriously inaccurate and that executives have to plan cautiously. For instance, a year ago many analysts predicted oil would cost less than $30 a barrel this quarter.
Bowlin said that long-term forecasts missed the biggest changes in prices in recent decades, and that executives have to rely on average prices in previous years for guidance. Companies cannot assume today's high prices will stick around.
"I don't think that anyone would go and bet their economics on anything like $50 oil," he said. "I don't think we have a ghost of a notion what oil is going to be in 10 years. . . . If you've been through enough booms and busts, you don't get over-euphoric on the up cycle or hopefully not over-depressed on the down cycle."
Fareed Mohamedi, chief economist for consulting firm PFC Energy in Washington, said that if oil companies raised the bar for new projects to $35 a barrel, many more would become viable. But he said companies were being prudent in showing restraint.
"We need to invest in capacity or prices would go to $100 a barrel," he said. "But at the same time, we don't want to sabotage ourselves. So what is the right level of investment to keep everything at the right price level?"
One factor limiting investment for international oil companies is opportunity. Analysts said many available prospects are too expensive, either because of the difficulty involved in production or because countries that control the properties are seeking too much in royalties.
Responding to questions in an e-mail, Exxon spokeswoman Susan Reeves wrote: "Price is not the major determinant in the pace of advancement of new world-class opportunities. Government approval, access and advancements in technology are far more important."
At an oil industry conference in Vienna in September, sponsored by the Organization of Petroleum Exporting Countries, Exxon's chief executive, Lee R. Raymond, called on countries that limit foreign investment to open their doors to international oil companies.
"The future need for petroleum energy will be such that restrictions, in whatever form and wherever imposed, will jeopardize the provision of adequate energy supplies to world consumers," Raymond told an audience that included oil ministers and other company executives.