Ah, investors—they make the oil and gas world go ’round. Whatever they bid, we do because, well, we need their capital, after all. Diversified portfolio? You’ve got it. Single-basin focus? Coming right up. Production growth at breakneck speeds? Done. Live within cash flow and drive free cash back to the shareholders? That’s a tough one, but we’ll make it happen. Promise.

It’s the last one that could result in unintended consequences, however, according to Bernstein Research.

Despite global oil demand growing 50% faster than the 20-year average at 1.5% annually, and more than 1 billion people in Asia looking to urbanize over the next 20 years, investors are aggressively urging oil companies to cut investments and max out cash returns to shareholders. Although this might feel good to the bottom line in the near term, it’s likely to cause severe pain in the long term, Bernstein analyst Neil Beveridge strongly suggested in a July 6 research note.

“While high free-cash-flow levels within the industry are impressive, companies are mortgaging the future with barrels from today,” he forewarned.

The risk for the oil industry by reducing investment today is creating a shortfall in oil supply tomorrow, he said. “Oil remains an essential part of our lives. Any shortfall in supply will result in a super-spike in prices, potentially much larger than the US$150/bbl spike witnessed in 2008.”

Amplifying the problem is the growing sect of investors with a mindset that any investment in fossil fuels is bad. Many hope that giving oil and gas proceeds back to investors so they can capitalize the renewables sector—vs. re-investing in hydrocarbons—will bring about a desired peak in oil demand. The opposite is likely true.

Global oil reserves are already declining precipitously. Proven oil reserves for the top 50 oil companies are close to record lows, 30% less than in 2000, according to Beveridge’s report. And many of the world’s majors are signing on to the climate change agenda of keeping more reserves in the ground. Spanish major Repsol is one example, vowing to limit output to current levels and contain its reserve life to eight years. Equinor—formerly Statoil—even changed its name to reflect its de-emphasis on oil.

If other companies follow the Repsol lead, said Beveridge, “then it implies that industry investment will stall.”

Such underinvestment is leading to an industry which, “in aggregate,” is not replacing reserves. “At some point the proverbial chickens will come home to roost. The impact will be production declines and another super-cycle in oil prices. Investors who had egged on management teams to reign in capex and return cash will lament the underinvestment in the industry.”

When might this happen? Beveridge doesn’t peg a date, but implies that—given a 10-year assumed window for long-term project development—the gig will be up in a decade, if not sooner.

But what about the American renaissance? Won’t shale production not only save the world from undersupply, but actually risk oversupplying the global market?

“The largest U.S. E&P companies which matter are included in the 50 largest companies. While there is a long tail beyond this, these companies do not have the scale to alter the overall conclusion,” Beveridge said. “It is only a matter of time when U.S. production peaks out in the early 2020s that the world will find itself scrambling for the next barrel of production.”

Still, the game plan is for renewables to come to the rescue, right?

Only by a miracle, he said. No other energy source in history—including oil—topped 10% of the energy mix within its first 40 years. Standing at 1% of the mix in 2012, for wind and solar to reach 10% by 2040 would be record breaking, he said. This means fossil fuels will have to carry 80% of the energy mix by that time.

Which means someone needs to fund that. And fast.

“The bottom line is that if oil demand continues to grow to 2030 and beyond, the strategy of returning cash to shareholders and underinvesting in reserves will only turn out to sow the seeds of the next super-cycle. Companies which have barrels in the ground to produce (or the services to extract them) will be the ones to own and those who do not will be left behind. In our view, another super-cycle in oil looks a foregone conclusion.

“Industry investment needs to increase—and soon.”

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