NEW YORK, Aug. 29 /PRNewswire-FirstCall/ - CIBC (CM: TSX; NYSE) - With
Tropical Storm Gustav bearing down on the Gulf of Mexico and most weather
agencies calling for an active hurricane season, American motorists should
brace for gasoline to spike to $5 per gallon as storms threaten to shut
down oil production in the region, predicts a new report from CIBC World
The report notes that oil production in the rig-dotted Gulf, which has
been seen as America's best hope for greater energy self-sufficiency, will
be increasingly threatened by severe storms that continue to grow in
frequency and strength in the region.
"Only three years after hurricanes Katrina and Rita devastated Gulf of
Mexico oil and gas production, an emerging hurricane storm is tracking
another potentially lethal swath through America's energy heartland," says
Jeff Rubin, Chief Economist at CIBC World Markets. "And with both oil and
gasoline inventories much lower than when Katrina and Rita hit, the price
consequences could be even worse this time. Any replays of the 2005 storm
season could see gasoline prices soar to $5 per gallon."
While Mr. Rubin acknowledges that the supply disruptions, and attendant
price hikes, will be temporary, he sees lasting impacts from hurricane
damage on future supply growth. "Protracted multi-year delays to marquee
projects like BP's Thunder Horse have meant that new production has grown
at a fraction of earlier projections for the region and has lagged well
behind rapid double-digit depletion rates that are characteristic of
"The net result has been a multi-year, and now likely irreversible,
decline in oil production from the region. Already down some 300,000
barrels per day from its pre-Katrina peak, Gulf of Mexico production is
likely to lose another 200,000 barrels over the next five years. Instead of
ramping up production to over 2 million barrels per day as once dreamed by
the Departments of the Interior and Energy, Gulf of Mexico production is
likely to fall to a low of a million barrels per day by 2013 - almost a
third lower than the region's production prior to the 2005 storm season."
The report notes that while previous hurricanes have caused equipment
damage and production losses, the toll has increased in recent years. The
top five hurricanes, in terms of lost production, have all occurred in the
last half-decade and their impacts are becoming more lasting. Three months
after Katrina and Rita hit, nearly 40 per cent of Gulf oil production was
still shut in. Together, Katrina and Rita damaged 167 offshore platforms
and 183 pipelines.
"The unprecedented 100 million barrels of shut-in from those storms
does not even begin to count longer term losses due to delays of as much as
three to four years in bringing new fields, like Thunder Horse, online,"
notes Mr. Rubin. "They also took offline as much as 25 per cent of the
nation's refinery capacity, 40 per cent of which is located in the Gulf
While the impact of Katrina saw oil prices jump by 10 per cent to a
record $70 a barrel, gasoline prices zoomed from just over $2 to well over
$3 a gallon. Crack spreads - the difference between the cost of a barrel of
oil, and the value of the products it can be refined into such as gasoline
- leaped to the $40-50 per barrel range, as storm outages strained refinery
Mr. Rubin says that alone added 75 cents or more to the cost of a
gallon of gasoline. Wider retail margins on crude shortage fears added 20
cents and the increase in oil prices themselves added another 20 cents.
Given tighter supplies and lower inventories, he doesn't think it will take
as large a supply shock today to cause a comparable pump price jolt as we
saw in 2005.
The report finds that the decline in Gulf production will be difficult
to replace. It notes that even if approval is granted to open development
in the Arctic National Wildlife Refuge (ANWR), the Department of Energy
estimates that first flow will not occur until 2018, and initial first
estimates from the Arctic are notorious for lengthy pushbacks. Moreover, it
would take a minimum of a decade after that to reach its ultimate projected
peak of 780,000 barrels daily.
"Whether we will see any oil flow from that, or for that matter, from
the other Arctic deposits in Canada, Greenland or Russia by 2018 remains to
be seen," states Mr. Rubin. "But it is certainly clear that no matter what
policies are taken toward the ANWR, the region will provide no offset to a
further decline in both Gulf of Mexico production and lower 48 state oil
production over the next five years."
During that time, total U.S. production is likely to decline by almost
600,000 barrels to 4.5 million barrels per day, with roughly half of that
drop coming from further reductions in conventional production from the
lower 48 states.
The report also cites major challenges in increasing imports from many
- Imports from Mexico, currently running at almost one-and-a-quarter
million barrels per day are likely to evaporate altogether over the
next five years. The giant Cantarell field, the source of nearly
40 per cent of Mexican production, faces the potential loss of
another 800,000 barrels per day over that time frame. Year-on-year
rates of decline over 30 per cent or more in the field's output
suggest Mexico will soon cease to be a net oil exporter altogether
within the next half-decade.
- Production in Venezuela, the next largest U.S. crude supplier, had
already started to decline prior to Hugo Chavez becoming president
and the drop has accelerated under his administration. While
Venezuela has oil sands, its deposits are deeper and more costly to
develop than Canada's. And unlike Canadian oil sands that are the
recipient of billions of foreign direct investments, Chavez'
expropriation of foreign oil companies will keep foreign capital
largely at bay.
- A simmering civil war in the Niger Delta makes Nigeria's 2.5 million
barrel-per-day production capacity an even less certain source of
- Canada, America's largest and closest supplier, can increase its
production only from oil sands. While industry plans call for a
doubling in production from just over a million barrels per day
during the next decade, lengthy delays and mounting cost overruns
have become the norm for the now mammoth sized Canadian oil sands
projects. And most of what is exported to the U.S. market requires
extensive refining to convert the fuel into synthetic crude.
"There is no debate that at today's oil prices U.S. demand will
continue to fall," adds Mr. Rubin. "The question is whether demand
destruction can keep pace with the destruction in supply."
The complete CIBC World Markets report is available at:
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SOURCE CIBC World Markets