Providing coverage of Alaska and northern Canada's oil and gas industry
May 2008

Vol. 13, No. 18 Week of May 04, 2008

Forget sky-high, try the stars, says CIBC

Economist hikes own oil price forecast as global production stagnates; says world headed for unprecedented scarcity

Gary Park

For Petroleum News

He was one of the first to predict $80 per barrel oil, then $100.

Now he’s talking more than double that price over the next five years and warning of possible economic turmoil in North America.

Backed by an accurate track record, Jeff Rubin, chief economist with the Canadian Imperial Bank of Commerce, is having trouble keeping pace with even his own predictions.

Just three months ago he was pointing to $150 inside four years.

Now that his team at CIBC has “re-examined” its projected supply outlook it has raised the target to $225, which translates into gasoline at $7 per gallon.

The updated forecast is driven largely by CIBC’s realization that global production has stagnated over the last two years at 85 million barrels per day, while about 50 percent of the increase in world petroleum production comes from natural gas liquids, a feedstock for the petrochemical industry, but of little use in the transportation sector, which claims 90 percent of every incremental barrel of oil.

NGLs, “while valuable hydrocarbons, are not a viable substitute for oil and cannot be economically used as a feedstock for gasoline, diesel or jet fuel,” the CIBC report entitled The Age of Scarcity said.

“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,” Rubin said.

“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,” he said.

Rubin said actual crude output is expected to grow by just 1 million bpd over the next several years.

Delays, cost overruns expected

Earlier this year, CIBC’s investment arm studied the world’s 200 largest new oil projects, including the Alberta oil sands which are projected to almost triple their output to 3 million bpd by 2015, and concluded incremental increases in production will be slowed over the next four years by protracted delays and cost overruns — familiar story in the oil sands.

As a result, it decided many world supply forecasts are unreasonably optimistic.

Noting the soaring demand in China, India, Russia and the Middle East for transport fuels, the CIBC predicts the accelerated sale of new vehicles such as the $2,500 Tata and Chery models being rolled off production lines in emerging economies means millions of households will “suddenly have straws to start sucking at the world’s rapidly shrinking oil reserves.”

In addition, the report said a decline in Russian oil production of 0.9 percent in the first quarter, that country’s first year-over-year drop in a decade, has triggered another concern about meeting emerging-market demand, according to Toronto-based Scotiabank economist Patricia Mohr.

Scotiabank said the overall commodity price index in Canada has climbed 181 percent from its cyclical low in October 2001, with the oil and gas index surging 11.8 percent in March, rising above its previous peak in October 2005.

The CIBC report also suggests that rising pump prices will force North American drivers off the road, lowering U.S. oil consumption by 2 million bpd over the next five years.

Rubin said there will be fewer people on the road in North America as the developing world claims a larger share of available gasoline.

He said that by 2012 oil consumption in the rest of the world will exceed that used by developed OECD countries, an unthinkable prospect over a decade ago.

Opposing view says exploration will be spurred

Global Insight, a market research firm that specializes in the auto industry, has estimated that every $10 per barrel rise in oil prices shrinks annual vehicle sales in the United States by 190,000.

Global analyst John Wolkonowicz said the auto industry is not prepared for such a dramatic change, which would “create absolute hell” as consumers scramble to buy more fuel-efficient vehicles.

But Wolkonowicz is among those who disagree with the CIBC prognostications, forecasting that oil will come down from $120 “because higher prices will spur more exploration.”

Rick George, chief executive officer of Suncor Energy, Alberta’s pioneer oil sands producer, also doubts current high prices are sustainable over the long-term, but he hesitates to play the numbers game.

“Your guess is as good as mine about where oil prices end up,” he said after Suncor’s annual meeting April 24.

He said Suncor, despite operating in what is widely rated as the world’s most costly environment — Suncor’s average cash operating costs in the first quarter were C$31.55 per barrel for 248,000 bpd, which it hopes to raise above 550,000 bpd by 2012 — can cover costs and generate an “acceptable” return at prices of $75 per barrel.

“You can attract investment and we can make progress, but we probably require an $80 to $90 crude oil price in terms of where we sit right now,” George said. “And I’m not thinking of just the oil sands. I’m thinking of where costs are on the conventional side.”

Justin Bouchard, an analyst with Raymond James, suggested Suncor’s planned C$20.6 billion expansion could still yield significant returns with oil at $65.

Although oil sands projects are a “little different,” it “makes a lot of sense to proceed” with expansions at current oil prices.

Bouchard is not ready to sign on to $200 predictions, noting that his target for 2008 of $110 is still considered bullish.

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