Analyst sees US oil supply cuts by 2012

Mexico, Saudi Arabia, Venezuela, Nigeria, Algeria, and Russia will cut crude exports to the US by 2012, intensifying investment in Canada's oil sands, an analyst predicts.

Sam Fletcher
Senior Writer

Mexico, Saudi Arabia, Venezuela, Nigeria, Algeria, and Russia will cut crude exports to the US by 2012, and the resulting gap between supplies and demand will intensify investments to develop Canada's oil sands, claims Jeff Rubin, chief market strategist and economist at CIBC World Markets, the wholesale and corporate banking arm of Canadian Imperial Bank of Commerce.

The anticipated total drop of 2.5 million b/d of production among six of the largest suppliers of oil to the US is part of the keynote address that Rubin was to deliver Oct. 2 at CIBC World Markets' Industrial Conference in New York City. At that meeting, Rubin was to share his latest research on the global balance of oil supply and demand, focusing on the size and scope of the oil crunch facing the US in the next 5 years.

But at the recent 6th Annual Association for the Study of Peak Oil & Gas conference in Cork, Ireland, Rubin said crude prices are likely to hit $100/bbl by the end of next year as the biggest oil-producing nations reduce exports to supply their rapidly growing domestic consumption (OGJ Online, Sept. 17, 2007). With production likely to plateau or decline in the six named countries, Rubin expects global oil exports to fall by 7% by 2010.

"Domestic demand growth of as much as 5%/year in key oil producing countries is already beginning to cannibalize exports and will increasingly do so in the future as production plateaus or declines in many of these countries," he said in Ireland. "OPEC members together with independent producers Russia and Mexico consume over 12 million b/d, surpassing Western Europe to become the second largest oil market in the world."

Rubin noted that consumers in many major oil-producing countries pay much less than the global price for crude. He said highly subsidized gasoline prices are often a factor in the surging rates of domestic oil consumption. "In many countries, prices are as little as $10/bbl," he said.

Canadian oil sands
In Cork, Rubin predicted Canadian oil sands will surpass deepwater wells as the single largest source of new oil exports by the end of this decade as markets are forced to rely more on higher-cost unconventional deposits. He said Canada's oil sands represent 50-70% of the world's oil reserves open to private investment, depending on the investment climate in Nigeria and Kazakhstan. "Canada remains one of the few places where there is still private access to strategically important reserves, in sharp contrast, for example, to the oil sand deposits in Venezuela," Rubin said.

In a Sept. 25 report, however, Edinburgh consultant Wood Mackenzie Ltd. said proposed changes by the Alberta Royalty Review Panel would reduce the commercial value of current and planned oil sands projects in Canada by $26 billion, at a long-term price of $50/bbl for North Sea Brent crude.

This isn't the first time that Rubin's estimates of oil prices and other economic measures have garnered international headlines. In a report published in April 2005, Rubin said, "Over the next 5 years, crude prices will almost double, averaging close to $77/bbl and reaching as much as $100/bbl by 2010. That's over twice the previous 6-year high (1980-85) following the second OPEC oil shock, when crude, in today's dollars, averaged the equivalent of $65/bbl. Tomorrow's price hikes won't be triggered by sudden supply disruptions like the Arab oil boycott of 1973 or the Iranian Revolution in 1979. Instead, they will follow from the inevitable collision between surging global crude demand and accelerating depletion of conventional crude supply. By 2010, prices will have to take out nearly 9 million b/d from world oil consumption—no mean feat for a world that has never been more thirsty for oil."

In that report, Rubin foresaw "some fundamental differences" from energy prices in the 1970-80s. "On the economic front, the impact of surging crude prices is likely to be far more deflationary than inflationary. During the 1970s, surging fuel costs were the catalyst for a huge outbreak of wage-price inflation, as workers futilely tried to protect the purchasing power of their incomes through ever-escalating wage demands. But that was in a world where most workers in G-7 economies were protected by huge trade barriers against competition from cheap offshore labor. In today's world, where production and jobs can easily be shifted to low-wage economies, North American wages will have to eat energy price increases, and in the process, stomach the loss of purchasing power that comes along with it," Rubin said.

(Online Oct. 1, 2007; author's e-mail:

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