Global oil supply challenges will drive gas to $4.50 gallon: CIBC World Markets

Crude prices to hit $150 a barrel within the next five years

Jan 11, 2008, 00:00 ET from CIBC World Markets

    NEW YORK, Jan. 10 /PRNewswire-FirstCall/ - CIBC (CM: TSX; NYSE) - U.S.
 consumers should brace for $4.50 gallon gas prices in the near future as
 global oil supply will increasingly have trouble keeping pace with demand,
 forecasts a new energy report from CIBC World Markets.
     The report predicts that surging demand in developing economies
 combined with accelerated depletion of existing supply and widespread
 delays in getting new oil fields up and running will see the global supply
 of oil fall as much as eight million barrels a day below U.S. Department of
 Energy and International Energy Agency estimates by 2012.
     "Those projections ignore two fundamental forces that have, in recent
 years, brought global production to a virtual standstill," says Jeff Rubin,
 Chief Strategist and Chief Economist at CIBC World Markets. "The first is
 depletion. You have to run faster to stand still. Depletion from existing
 fields has accelerated to over four percent, a rate that currently cuts
 nearly four million barrels per day out of each year's production.
     "The second fundamental force blowing up supply forecasts is the huge
 project delays and massive cost overruns associated with many of the
 world's largest new oil mega-projects. From Kazakhstan to Nigeria's Delta
 region, protracted delays in some of the world's largest energy
 mega-projects will have huge impacts on actual supply growth over the next
 five years."
     As part of its research, CIBC World Markets reviewed nearly 200 new oil
 projects slated to start production over the next five years and found that
 scheduled production timelines are far too optimistic, with project delays
 the norm, not the exception, among the group.
     It found that heavy reliance on increasingly high cost and technically
 challenging fields like the Kashagan project in Kazakhstan, Russia's
 Sakhalin II and Canadian and Venezuelan oil sands have left world supply
 growth vulnerable to a seemingly never-ending series of project delays.
     Mr. Rubin notes that delays in the latter two countries will shave over
 700,000 barrels a day from earlier 2012 production forecasts. In some
 nations, soaring development costs have resulted in complex and often tense
     negotiations of royalty agreements with host countries. Some have even
 led to either a temporary or indefinite suspension of operating licenses.
     "Of course, stagnant conventional world oil production underlies the
 recent problems associated with harvesting unconventional supply. Virtually
 all of the increases in global oil production have occurred from deepwater
 fields or oil sands, with conventional production seemingly stuck at 2005
 levels of 67 million barrels per day."
     These project delays are also happening at a time of accelerated global
 depletion in existing fields. The rate has climbed to over four percent,
 which cuts nearly four million barrels per day out of each year's
 production. The recent increases are in part, related to the growing
 importance of offshore, and, in particular, deepwater fields, which have
 depletion rates twice that of conventional fields.
     "Cliff-like depletion rates have already been in evidence in the North
 Sea and now the huge Cantarell field in Mexico," adds Mr. Rubin. "Since
 2000, offshore fields have been the single-largest source of new supply
 growth. As their weight in total production increases, future depletion
 rates will continue to rise. Even holding the current depletion rate
 constant over the next five years, we must produce nearly 20 million
 barrels per day of new oil just to offset what will be lost through
 depletion during this period."
     Mr. Rubin notes that these major project delays and increasingly rapid
 depletion will result in a supply increase of only about three million
 barrels a day by 2012 - far below the 10 million barrels projected by the
 International Energy Agency. With oil demand soaring in places like China,
 India, Russia and in the world's largest oil-producing countries
 themselves, a widening demand-supply gap will push crude oil prices to as
 high as $150 a barrel by 2012.
     "Soaring rates of car ownership in countries like Russia and China have
 boosted fuel demand in both countries," says Mr. Rubin. "For example,
 gasoline, a key driver of rising oil use, is growing at over six percent in
 both countries. But an even more important factor has been massive price
 subsidization in OPEC countries which has spurred extraordinary
 near-double- digit growth in oil demand.
     "Not only is there virtually no price elasticity between OPEC's own oil
 consumption and world oil prices but paradoxically, domestic consumption of
 oil in those countries may actually increase with rising world oil prices
 because higher crude prices boost incomes, which in turn, further boosts
 demand for massively subsidized domestic gasoline."
     The result of this unchecked soaring demand in most oil-producing
 nations means they will not be able to add any additional exports to meet
 the surging demand in developing countries. Since crude demand in countries
 like China and India is far more income-elastic than price-elastic, these
 countries are likely to outbid OECD markets for increasingly scarce global
     The OECD, the largest global oil market today, is much more price
 sensitive and oil consumption, which has already fallen over the last two
 years, will decline by almost four million barrels per day over the next
 five years in response to steadily rising prices.
     In the U.S. alone, with soaring crude prices pushing the cost of
 gasoline to $4.50 a gallon, Mr. Rubin expects American demand for oil to
 drop by 10 per cent or nearly two million barrels a day by 2012.
     The complete CIBC World Markets report is available at:
     CIBC World Markets is the wholesale and corporate banking arm of CIBC,
 providing a range of integrated credit and capital markets products,
 investment banking, and merchant banking to clients in key financial
 markets in North America and around the world. We provide innovative
 capital solutions and advisory expertise across a wide range of industries
 as well as top-ranked research for our corporate, government and
 institutional clients.

SOURCE CIBC World Markets