Saturday, 26 April, 2008 1:20 AM
High Gas Prices
are here to stay - U.S. Motorists should brace for over $4 Gallon
Gas this summer and near $7 by 2012
global supply will drive oil prices past US$200 a barrel in next
BY JASON RZUCILO / ©2008 AMERICAJR.com
prices at this Chevron station in California were $3.55 per gallon
for regular, $3.67 for mid-grade and $3.77 for premium on March
NEW YORK --
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 the U.S. with the national average price
easily topping $4.00 this summer, reaching $5.50 in the summer of
2010 and hitting close to $7.00 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 jet fuel.
"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
"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
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 price
has 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 US$3.60 a gallon mark to almost US$7 a gallon.
The complete CIBC World
Markets report is available at: http://research.cibcwm.com/economic_public/download/sapr08.pdf.
Source: CIBC World