Tightening global supply will drive oil prices past US$200 a barrel in
    next four years

    TORONTO, April 24 /CNW/ - CIBC (CM: TSX; NYSE) - 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 Canada with the
national average price topping $1.40 this summer, $1.80 in the summer of 2010
and $2.25 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 period.
    "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 levels."
    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 $1.20 a litre mark to $2.25 a litre.
    The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/sapr08.pdf.

    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.