The world faces a serious oil supply crunch within five to 10 years that may drive prices up to more than $200 a barrel, a British think tank said on Friday. The Chatham House report says $200 oil is possible, barring a collapse in demand, because of inadequate investment by oil companies in raising output - not because of a lack of oil underground. A supply crunch appears likely around 2013, "even allowing for some increase in capacity over the next few years," says the report by Paul Stevens, a senior research fellow at Chatham House. "The implication is that it will quickly translate into a price spike although there is a question over how strategic stocks might be used to alleviate this," the report adds, concluding that "a spike of over $200 is possible." The report concedes that it uses a "controversial and extremely bullish" forecast of future oil demand and supply. It assumes Saudi production capacity will remain flat after reaching 12.5 million barrels per day in 2009 and that the capacity of other OPEC countries remains flat after 2008. Oil prices have risen sharply in the last few years, with US crude shooting to a record of more than $147 a barrel in July before easing back to around $120 now. The report said investment in new oil supplies has been and will be inadequate, partly because international oil companies have incentives to return dividends to shareholders rather than reinvest them. It also cited "resource nationalism" in some producer countries that exclude international oil companies from helping develop production capacity. It also noted that some governments limit investment in their national oil companies. The report noted that governments in industrialised countries have been reluctant to intervene in energy markets. It said markets alone could not provide sufficient incentives for conservation or to bring more energy on-stream, and that a price spike might break down opposition to intervention. Stevens told Reuters he favored greater government intervention, but said it should be "intelligent intervention." "A good example is energy conservation and improved energy efficiency. If you leave that to the market it is simply not going to happen, or is going to happen very, very slowly," he said. Stevens had mixed feelings about the scenario his report paints. "At one level we should be worried because it means we are going to be running into energy shortages. On the other hand maybe it's a good thing, maybe that's what we need - much higher prices - to actually get people to start doing sensible things about energy," he said. Meanwhile, in New York, oil prices fell Friday as the dollar rallied strongly against slumping foreign currencies. Light, sweet crude oil for September delivery fell $2.45 to $117.57 on electronic trading on the New York Mercantile Exchange, after dipping as low as $117.05 in electronic trading. In London, September Brent crude was down $1.84 at $116.02 a barrel on the ICE Futures exchange. Oil had risen $1.14 Thursday to close at $120.02 a barrel after Turkey's state-run news agency Anatolia said the pipeline, attacked by the separatist group Kurdistan Workers' Party, could be shut down for up to 15 days. The pipeline can pump slightly more than 1 million barrels of crude oil per day, or more than 1 percent of the world's daily crude output. Crude reversed course after settling higher Thursday, following decisions by the European Central Bank and the Bank of England Friday to hold key interest rates steady. ECB President Jean-Claude Trichet said the decision to keep rates at 4.25 percent came as inflation remains a concern, though the European economic growth outlook was gloomy. "Looking ahead, based on the current prices for futures commodities, the ... annual inflation rate is likely to remain well above a level consistent" with the bank's goal "for quite some time," Trichet said. That sent the dollar soaring against the euro, pound and yen. The 15-nation euro bought $1.512, down 1.3 percent from Thursday's levels. That's a five-month high for the dollar, according to wire reports. The British pound fell 1.2 percent to $1.922, and the dollar rose 0.3 percent against the Japanese currency to ¥109.81. Like all dollar-traded commodities, oil prices tend to fall when the US currency rises. A stronger US dollar makes oil more expensive for foreign investors. Though in the recently slumping US economy, many investors used the commodity as a hedge against inflation when the dollar has fallen, as the dollar begins to rebound, investors have shifted their money to other investments like stocks and bonds. With the dollar increasing in value against the euro and yen after the European Central Bank and the Bank of England both left their benchmark interest rates unchanged, traders found some reason to sell. The weak dollar had previously been boosting oil prices, because dollar-denominated commodities are often used as hedges against inflation and a falling US currency. By early US trading, the euro dropped to $1.5067 against the dollar, while the dollar rose to 109.93 yen. Furthermore, the central banks' actions bolstered the growing belief in the energy markets that economic growth is slowing and dampening demand for crude oil products. "The dollar is a factor, but the dominant factor is the perception that high oil prices coupled with slower economic growth in developed countries will curb oil demand," said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney. "Oil prices are still at very high historical levels." Nymex front-month crude futures are down about 18 percent from a record high of $147.27 hit on July 11, but are still up more than 60 percent from a year ago. In other Nymex trading, heating oil futures slipped by more than 5 cents to $3.18 a gallon, while gasoline prices fell by over 4 cents to $2.96 a gallon. Natural gas futures fell by more than 10 cents to $8.47 per 1,000 cubic feet.
