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Page added on April 21, 2012

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High oil prices threatened by … high oil prices

The fivefold increase in oil prices over the past decade has created boom times in Alberta, in North Dakota and in crude-producing regions across the globe, but the era of $100-a-barrel oil may be sowing the seeds of its demise.

Oil-consuming nations, such as the United States and China, have become preoccupied with security of supply, amid predictions of “peak oil” in which the global energy industry will have trouble keeping pace with rising demand.
But oil producers are increasingly worried about “security of demand.” And none have greater cause for concern than those in landlocked Alberta. The crude they sell is some of the world’s most expensive to produce, and they need a massive and politically-challenging expansion of pipelines to get it to global markets.

The bullish view is that higher global prices are here to stay. In this scenario, global oil use will continue to go up, and the industry will have difficulty replacing the depletion in existing oil fields – let alone meeting the rising demand from a billion Chinese who aspire to a middle-class life, and their compatriots across the emerging economies.

Then factor in the reality that much of the world’s crude exports originate from the most politically-volatile region on the planet, the Persian Gulf. It’s not hard to forecast $120 (U.S.) a barrel if Iran’s nuclear ambitions result in continued political tension, or the price even spikes to $150 to $200 if those tensions escalate into attacks that threaten the key oil trade choke point at the Strait of Hormuz at the mouth of the Persian Gulf.

“I think, generally, oil prices are going to stay at historically high levels and the reason is the political risk around Iran,” said Patricia Mohr, vice-president of economics and commodity market specialist at Bank of Nova Scotia.

The benchmark international crude, North Sea Brent, closed at $118.76 (U.S.) on Friday, while the North American benchmark, West Texas intermediate, ended at $103. Ms. Mohr forecasts that the price of both will go up from here, and stay high into 2013.

But other analysts are more focused on shifting supply and demand fundamentals – and those are less favourable to high oil prices. The International Energy Agency reported this week that global oil markets have turned the corner: Producers are pumping more oil just as consumers are constraining their use of it, easing concerns about shortages.

Energy economists at Raymond James Financial Inc. have dramatically cut their medium-term price forecast, citing eroding growth in demand and booming U.S. production from tight oil plays like North Dakota’s Bakken.

The U.S.-based brokerage slashed its 2013 forecast for WTI prices to $90 (U.S.) a barrel from $105, and its long-term target to $90 from $125 (U.S.) a barrel. It also cut its forecast for Brent crude.

In part, the lower forecasts are the result of “demand destruction” as consumers adjust to $100 oil by driving less or buying more efficient cars. But the bigger story is the dramatic growth from U.S. and Canadian tight, light oil production, as companies adopt the drilling and hydraulic fracturing techniques that resulted in the shale gas revolution.

While the growth in production is a real phenomenon, Raymond James analysts have made a “mind-boggling” forecast: the U.S. supply will grow from 5.1 million barrels a day in 2010 to nine million by 2015. The additional four million barrels in production is enough to drive down global prices, analyst Alex Morris said.

And Raymond James is not alone in its bearish assessment of future crude prices.

Energy economist Phil Verleger said consumers across the globe are changing their consumption patterns in the face of triple-digit crudes prices, and that adjustment will have a significant impact on prices.

He noted that U.S. gasoline demand is down 6 per cent in 2012 from the corresponding period in 2011.

“Few forecasters have really gotten the message yet – that’s almost one million barrels a day in global demand,” said Mr. Verleger, who recently did a stint as visiting economist at the University of Calgary. “What that’s doing is pulling down heavily the price of crude.”

The economist said oil producers have long been counting on China to take up the slack from slower-growing developed countries, where oil demand is thought to be in permanent decline. But he said China faces major economic problems of its own, and he does not share the common view that it will enjoy uninterrupted, stellar growth rates.

“The question really is: Is China going to surge back and offset the United States? And I don’t think they will,” he said. “And if China doesn’t surge back, then we get significantly lower prices.”

Mr. Verleger said the floor price for crude really depends on OPEC, and particularly Saudi Arabia, which needs prices of between $90 and $100 to finance its ambitious economic program aimed at addressing social unrest.

While the Saudis will aim for a price of no lower than $90, they will occasionally flood the market to chase high-cost competitors – like Canada’s oil sands companies – out of the market.

“I can see the Saudis letting it go to $50, maybe $70 – whatever it takes to put the oil sands in Alberta in jeopardy.”
Globe and Mail



6 Comments on "High oil prices threatened by … high oil prices"

  1. Kenz300 on Sat, 21st Apr 2012 5:14 pm 

    Demand for oil is dropping in the US. It is growing faster in China and India than it is dropping in the US increasing world oil demand every year. China is the driving force in oil prices. As long as its economy is growing at 8% a year oil producers will have a tough time keeping up with supply.

  2. CAM on Sat, 21st Apr 2012 9:50 pm 

    Not sure that the Saudis can afford to let oil go to $50-70 a barrel anymore, but that could happen if economies don’t improve. Anyway, conventional oil production has stagnated for about 5 years. It appears that the only chance for increased oil production lies with far more expensive oil. Even if demand drops, prices may not follow!

  3. kervennic on Sat, 21st Apr 2012 11:22 pm 

    There is a common saying that the oil price reflects economical situation.

    I would not be surprise that this is less and less the case. Because our western civilisation, based on oil, has conquered every sqkm of this world, it has forced a global addiction. But unlike drug, this addiction cannot not be stopped in many case. Populaton has grown, resources have shrinked and oil has become a vital thing for billion of people (in the sense that they would die without it).

    One can think of india small farming that i full dependent of water pumping and oil because it has depleted shallow water aquifer. Oil is at the same level of importance as water in this case, and there are many more example that show that when we reach this kind of use (replacement of gone firewood, necessity to transport vital goods because of local depletion), one cannot go back.

    We never see any calculation of resilience in price to understand future trend in case of global recession,meaning, if somebody earn less, will he really consume less oil or in certain case it is simply impossible.

  4. Gleb on Sun, 22nd Apr 2012 12:07 am 

    I suppose the Saudi’s would if they could try to force Canada out but they have their own stressed fields to worry about.

  5. BillT on Sun, 22nd Apr 2012 1:10 am 

    The world is a basket case today and that bodes poorly for any chance of oil getting cheaper.

    Saudis need $100+ oil to keep their people from revolt and if that happens the Saudi supply may disappear for a long time.

    Canada needs $80+ oil to make their tar sands profitable and needs expensive pipelines to sell it. More investment in a financially squeezed world.

    Africa has oil but is also a powder keg of unrest with countries at war over the stuff. No reliable sources there.

    Iran sits on the 2nd largest reserve, but they are daring to move away from the dollar and the Empire doesn’t like that but is caught in a ‘catch 22’ situation. Allow the dollar to be displaced and have the Us economy collapse or invade and chance shutting off 20% of the world’s oil, causing the World economy to collapse.

    Russia just needs all it can get for it’s oil so it can continue to rebuild its country, so they support high prices.

    Ditto Venezuela. Ditto most other oil exporting countries.

    Then there is the hype of ‘plentiful oil’ being pushed by the oil pimps in the Us. Lies and ‘what ifs’ that will keep the sheeple ignorant until the elite have finished turning the sheeple into serfs.

    What a crazy world we live in. High oil prices and pain or low oil prices because the world is in a depression and dying with even more pain.

  6. Kenz300 on Mon, 23rd Apr 2012 1:25 pm 

    Demand for oil in China and India will continue to be the driving force in oil prices. China is now the worlds largest auto market and they use more oil every day.

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