Prices to hit US$150 a barrel within the next five years

    TORONTO, Jan. 10 /CNW/ - CIBC (CM: TSX; NYSE) - Canadians should brace
for $1.50 litre 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 per cent, 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 Venezuela and Canada 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 re-
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 per cent,
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 US$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 per cent 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 supply.
    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 US$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:
http://research.cibcwm.com/economic_public/download/occrept65.pdf.

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