CANADIAN PRICES SEEN KEEPING HIGH LEVEL

Even if there is a peaceful resolution to the Middle East crisis, Canadian oil product prices will stay relatively high, predicts Canadian Enerdata Ltd., a Markham, Ont., energy consulting firm. It concludes that events in the Persian Gulf region since Iraq's Aug. 2 blitz of Kuwait have brought about a "new era of permanently higher energy prices," although natural gas prices will be much flatter than those of oil products. Enerdata analyzed the effects of the Middle East crisis on Canadian

Nov. 19, 1990

5 min read

Even if there is a peaceful resolution to the Middle East crisis, Canadian oil product prices will stay relatively high, predicts Canadian Enerdata Ltd., a Markham, Ont., energy consulting firm.

It concludes that events in the Persian Gulf region since Iraq's Aug. 2 blitz of Kuwait have brought about a "new era of permanently higher energy prices," although natural gas prices will be much flatter than those of oil products.

Enerdata analyzed the effects of the Middle East crisis on Canadian product prices, in constant Canadian dollars, under three scenarios:

With an outbreak of war, Enerdata's most likely scenario, gasoline and fuel oil prices will remain at current levels through the winter and perhaps longer. Gas prices will stay fairly constant at least through 1991.
In the event of a long embargo, prices also will remain high.
If there is a quick, peaceful solution, prices will be steadily higher in the short term because of the time required to resume Iraqi and Kuwaiti production. They would fall in second quarter 1991 but still remain at or above pre invasion levels.

Although spot prices tend to overshoot the price the market will bear, Enerdata contends oil prices in general have shifted permanently to a higher level and are unlikely to fall below $20/bbl again.

WAR MOST LIKELY

The scenario Enerdata foresees as the most likely is war between Iraq and the U.S. led military contingent. Here is the expected chain of events:

U.S. forces bomb and destroy Iraq's command centers, weapons plants, and missile batteries. The Iraqi air force is neutralized in a matter of days.
Iraqi armor and ground forces attack Saudi Arabia but are unable to reach the well fortified Saudi oil terminals at Ras Tanura and Juaymah, 150 miles from the Kuwait border.
Iraqi forces withdraw or are driven from Kuwait.

Use of military force by the U.S. and its allies against Iraqi troops in Kuwait probably would inflict severe damage on Kuwaiti oil installations. War may not greatly cut Middle East oil production, however, if the U.S. led force prevails quickly.

Under those circumstances, unleaded gasoline is expected to average 55.7cts/l. in 1990, up from the 1989 price of 51.6cts/l. The price will continue rising to 58.6cts/l. in 1991 and 60.1cts/l. in 1992.

No. 2 fuel oil will end up at 36.4cts/l. this year from 30.2cts/l. in 1989, then rise to 37.7cts/l. in 1991 and 38.2cts/1.

Weighted average Alberta border prices for gas will average $1.76/Mcf in 1990 and $1.69/Mcf in 1991 before surging to $1.89/Mcf in 1992. Although short term firm sales will increase by about 100/Mcf during 1989-90, interruptible spot sales will fall nearly 20cts/Mcf. Firm and spot prices will increase 15 20cts/Mcf in 1991-92.

HIGH PRICE CASE

If there is a long embargo, there is enough world production to satisfy demand through autumn. Oil inventories will have to be drawn down in winter, however, to satisfy peak demand.

Spot prices at about $30/bbl may induce refiners and trading companies to liquidate inventories in 1991.

A continued embargo will keep world prices at the $30/bbl level throughout most of 1991.

Regular unleaded gasoline in Canada will average 56.2cts/l. in 1990, up from 51.6cts/l. in 1989, then continue the upward spiral to 61cts/l. in 1991 and 62.9cts/l. during 1992.

No. 2 fuel oil will balloon to 37.2cts/l. this year from 30.2cts/l. in 1989, and level off to 39.9cts/l. in 1991 and 40.3cts/l. in 1992.

The average gas price of $1.72/Mcf in 1989 will continue rising to $1.78/Mcf in 1990, $1.83/Mcf in 1991, and $2.03/Mcf in 1992. As with the mostly likely scenario, however, spot gas prices will drop about 14cts in 1990 to $1.49, then rebound to $1.57/Mcf in 1991 and $1.72/Mcf in 1992.

LOW PRICE CASE

If he can find a face saving avenue of retreat, Saddam Hussein may withdraw from Kuwait rather than fight an all out war with the U.S., Enerdata says.

Because so many conditions would be tied into an Iraqi pullback, even a peaceful resolution of the crisis would not soon restore Iraqi or Kuwaiti production. With those two countries out of the oil supply picture for several months, West Texas intermediate (WTI) is expected to average near $30/bbl.

Renewal of Kuwaiti and Iraqi exports will push the WTI price down, but not much below $20/bbl, says Enerdata in its low case forecast. With Iraq's military might intact, the threat of aggression will deter gulf states from exceeding Organization of Petroleum Exporting Countries' production quotas.

Even by withdrawing, Hussein will have scored a major economic victory by forcing up world oil prices for good.

Under those conditions, Canada's regular unleaded in 1990 will average 55.2cts/l., up from 1989's 51.6cts/l., then 55.8cts/l. in 1991, and 57.2cts/l. in 1992. No. 2 fuel oil will climb 5.4cts to 35.6cts/l. in 1990, level off at 34.9cts/l. in 1991, then rise to 36.1cts/l. in 1992.

Gas will hold steady at $1.73/Mcf in 1990. Enerdata expects a decline to $1.59/Mcf in 1991, then a rebound to $1.80/Mcf in 1992. Short term firm sales will generally follow that pattern, but spot sales will decline about 22cts in 1990 and another 8cts in 1991 to $1.33/Mcf, then jump back up to $1.50/Mcf in 1992.