Canada alone to fill oil gap: CIBC

Canada’s oil sands are primed for further investment as the global supply of crude dwindles in the coming decade, according to a report out of CIBC World Markets. The shrinking supply stems from an unexpected problem: rapidly increasing consumption in oil-producing countries.

Soaring oil prices over the past five years have poured billions of dollars into the economies of exporting nations in the Middle East, Russia and Mexico. As that wealth filters down through the economy, more people can afford automobiles, driving up domestic demand for fuel.

The CIBC World Markets report entitled OPEC’s Growing Call on Itself predicts that exports from these countries could fall by as much as 7% over the next decade. These countries could cut exports by as much as 2.5 million barrels a day before 2010, driving oil prices even higher.

“One of the few areas where production can be expanded significantly is the Canadian oil sands,” says Jeff Rubin, chief economist and chief strategist at CIBC World Markets. “Already at over a million barrels per day, production is slated to triple over the next decade and by 2020 could well be producing over 4 million barrels per day.”

Not only does Canada appear to be alone in its ability to increase production, but it is also the only major oil-exporting country to have cut consumption last year. Rubin says environmental policies are likely to keep demand in check in the future as well.

Meanwhile, major exporters such as Iran, Saudi Arabia and the United Arab Emirates have all seen demand grow by more than 5% per annum over the past five years.

In 2006, the combined consumption of Russia, Mexico and the OPEC states was second only to that of the U.S., at 12 million barrels a day. The report points out that many of these countries subsidize the domestic price of petroleum products, effectively limiting the price of crude to a range of $10 to $20 US per barrel. With little economic incentive to curb consumption, export capacity is dwindling.

“With domestic consumption growth of nearly 5–6% now standard in the Middle East, OPEC’s future export capacity is increasingly called into question,” Rubin says. “Particularly now that the cartel seems to no longer be able to raise production as readily as it has in the past.”

Even in Russia, demand growth is about double that of production growth, pointing to a crisis in the making. As early as 2008, Russia could start to cut its crude exports.

Meanwhile, multinational oil companies find themselves locked out of countries that have nationalized their energy industry, such as Venezuela. Even if they have access to a country, they may find stiff competition from state-owned companies when bidding for oil rights.

“For most multinational oil firms, the world is rapidly shrinking,” Rubin says. “Canada remains one of those few places where governments have been content to take their share of economic rents through royalties and not be concerned about the ownership per se.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com