TORONTO, April 24 /CNW/ - CIBC (CM: TSX; NYSE) - Increasingly tight oil supplies will continue to push the price of oil higher with the cost of crude hitting US$150 a barrel by 2010 and soaring to US$225 a barrel by 2012, forecasts a new energy report from CIBC World Markets.
This will result in skyrocketing consumer gas prices in Canada with the national average price topping $1.40 this summer, $1.80 in the summer of 2010 and $2.25 by 2012.
The report finds that current oil production estimates produced by the International Energy Agency (IEA) overstate supply by about nine per cent since it counts natural gas liquids in its numbers. The report notes that natural gas liquids, while valuable hydrocarbons, are not a viable substitute for oil and cannot be economically used as a feedstock for gasoline, diesel or
"While natural gas liquids only account for 10 per cent of total supply, they account for virtually all of the increase in petroleum liquids production since 2005," says Jeff Rubin, Chief Strategist and Chief Economist at CIBC World Markets. "Stripping out natural gas liquids, oil production has not grown for over two years, which certainly goes a long way to explaining why
oil prices have doubled over that period.
"In light of these developments we have re-examined our projected supply increases. The distinction turns out to be critical. Roughly 50 per cent of the increase in expected production is likely to come from natural gas liquids, leaving only small marginal gains in petroleum supply over the next two years."
The ratio of natural gas liquids to total "oil" production has been rising steadily in recent years and is likely to continue to rise for the foreseeable future. Whereas these hydrocarbons represented only about four per cent of total oil production back in the 1970s, CIBC World Markets expects them to account for over 10 per cent of total production by 2012.
This increasing ratio is coincident with accelerating depletion rates in many of the world's largest and most mature oil fields. While natural gas can occur on its own, much of it is "associated" gas-found together with oil. As an oil field matures, the resulting loss of reservoir pressure releases dissolved natural gas. The released gas forms an expanding cap over many mature oil fields, resulting in a rising ratio of natural gas to oil and hence a rising ratio of natural gas liquids to oil production.
Given this trend, Mr. Rubin finds that the global oil market is much tighter than the IEA forecasts. He believes oil production will hardly grow at all with average daily production between now and 2012 rising by barely a million barrels per day.
"Whether we have already seen the peak in world oil production remains to be seen, but it is increasingly clear that the outlook for oil supply signals a period of unprecedented scarcity," adds Mr. Rubin. "Despite the recent record jump in oil prices, oil prices will continue to rise steadily over the next five years, almost doubling from current levels."
The report also notes that while production increases are at a virtual standstill, global demand continues to grow. While higher prices and a weak economy have seen demand drop in the U.S. - as it has in other OECD nations - this has been more than offset by demand growth outside the OECD.
"Car purchases in Russia, for example, are exploding as U.S. sales stagnate," says Mr. Rubin. "While in India the advent of the TATA, a car that will sell for as little as US$2,500, will allow millions of households in the developing world to own automobiles when they otherwise could not. Millions of new households will suddenly have straws to start sucking at the world's rapidly shrinking oil reserves."
Car sales in Russia grew by nearly 60 per cent in 2007, 30 per cent in Brazil and 20 per cent in China. During the same period, car sales declined in the U.S. and were flat in Europe. Transport fuels now account for half of the world's oil usage, and have driven over 90 per cent of demand growth in recent years.
Mr. Rubin adds that this new and growing market for oil will see world crude prices continue to rise and kill demand in the more price-sensitive OECD markets. This has been the case since 2005 where a virtual doubling in pricehas led to declining consumption, a phenomenon not seen since the early 1980s. He predicts that by 2012, consumption in the rest of the world will exceed
OECD consumption, a virtually unthinkable prospect little over a decade ago, when consumption outside of the OECD measured little more than half of the OECD's annual oil intake.
"In order to accommodate more drivers on the road in Russia, China and India, there must be fewer drivers in the U.S. and the rest of the OECD. And so there will be. U.S. oil consumption is likely to fall by over two million barrels a day over the next five years as retail gasoline prices rise from their current $1.20 a litre mark to $2.25 a litre.
The complete CIBC World Markets report is available at: