If you think oil prices are high now, just wait four years. Jeff Rubin, a leading economist at CIBC World Markets, expects oil prices to nearly double by 2012.
The increase will happen, he says, primarily because of supply issues. “Our latest review of supply suggests oil production will hardly grow at all, with average daily production between now and 2012 rising by barely more than a million barrels per day.”
That doesn’t mean other types of gases aren’t being produced. Rubin says millions of barrels of hydrocarbons — or natural gas liquids — are increasing energy supplies, but that won’t solve the world’s growing gas problems.
“That’s fine if you need to refill your lighter, but not so great if your gas tank runs dry,” says Rubin. “While natural gas liquids such as butane, propane and hexane are valuable hydrocarbons in their own right, they cannot be used to meet the world’s growing appetite for gasoline, diesel or jet fuel.”
Rubin says the increasing production of natural gas liquids “is not a technical coincidence,” but rather it proves how dire the oil situation is these days. “It is a sign of accelerating depletion as declining well pressure releases increasing amounts of trapped natural gas in mature oil fields,” he says.
Ramped-up liquid natural gas production also highlights oil’s supply and demand imbalance, explains Rubin. “New car owners in BRIC countries and elsewhere in the developing world will be demanding gasoline and diesel, not butane.”
Demand will only increase as cheaper cars from Tata and Chery allow consumers in the developing world to finally own their own vehicles. When this happens, oil prices will rise even higher and will “kill demand in the more price-sensitive OECD markets.”
Rubin says the only way to eliminate demand is to reduce the number of drivers on the road, a scenario that is unlikely to happen anytime soon. He predicts gasoline prices will rise from today’s average of about $1.20 a litre to $2.25 a litre by 2012, while crude oil will reach $225 a barrel in four years.
CIBC’s outlook is bolstered by the Scotiabank Commodity Index, which jumped 5% month over month in March, reaching a new high.
The Oil and Gas Index jumped 11.8% in March, effortlessly passing its previous peak, set back in October 2005. Scotiabank expects the index to climb even higher in April.
The bank says the jump was partly the result of renewed concerns over supply disruptions in Nigeria, while “fund interest in commodities as an asset class, and a hedge against a soft U.S. dollar” have also contributed to the “relentless rise” in oil prices. A drop in Russian oil production in Q1 of this year also has people worried about the world’s ability to meet growing demand for oil.
“This year is likely to be the third year running when the growth of non-OPEC oil output has failed to keep pace with world demand, even assuming softer U.S. consumption,” says the Scotiabank report.
Overall, Scotia’s All Items Index climbed 181.2% over the cyclical low in October 2001, while the Metals and Mining Index jumped by 8.3%, passing its previous peak, reached in May 2007.
Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com
(04/24/08)