CIBC World Markets has prepared a report on the "How High Will Oil Prices Go? The report argues that oil prices will continue to accelerate. The report authors - Jeff Rubin and Peter Buchanan - note that much smaller net production gains than were previously forecast now point to a more rapid escalation in crude prices over the next several years, with prices likely to soar to an average of US$150 /bbl by 2010 and continuing to rise to over US$200/bbl by 2012.

As a consequence they have reduced their estimates for net global supply increases by nearly 1 mn bbl/day for the 2008 through 2010 period, and by over half a million barrels for the two years after that, leading to a discernibly tighter oil market than we had previously projected (Chart 1).

At the same time, there is little evidence to suggest that there is any compensating reduction in global demand growth. Instead, aggregate crude demand remains robust as burgeoning demand for crude oil outside of the

OECD, and in major oil-producing countries in particular, has more than offset demand destruction in OECD markets. The report notes that juxtaposed against more limited supply gains, the growing demand for fossil fuels in developing countries signals increased global competition for scarce oil resources.

This competition will be particularly intense with respect to the automobile sector. The report notes steadily growing global demand for gasoline and diesel, as car ownership rates in BRIC countries (Brazil, Russia, India and China)  and other parts of the developing world take off. Car purchases in Russia, for example, are exploding as US sales stagnate (Chart 2), while in India the advent of the Tata Nano, a car that will sell for as little as US$2,500 will allow millions of households in the developing world to own automobiles when they otherwise could not. It is the savings necessary to buy a car, not the price of gasoline that poses the greatest obstacle to fuel demand growth in those countries. But between rapidly rising domestic incomes and rapidly falling car prices, that obstacle is becoming more and more surmountable.

This is indicative of a major shift in the global pattern of oil consumption, notes the report. "The more oil is consumed in oil-producing countries, the less oil will be consumed in the OECD. Since oil-producing countries effectively have first call on their own oil, the balance is the residual which the price mechanism must ration. Boosted by the explosive growth in oil consumption in oil-producing countries, we expect that by 2012, consumption in the rest of the world will exceed OECD consumption, a virtually unthinkable prospect a little over a decade ago, when consumption outside of the OECD measured little more than half of the OECD’s annual oil intake (Chart 7)."

If CIBC is correct this should bode very well for alternative energies sources, especially renewable electricity. As oil prices rise,  the world will eventually turn more to energy substitutes such as hydro, run-of-river, tidal, wave, geothermal, nuclear, etc. As well, the CIBC report does not dwell on the very strong supply of unconventional hydrocarbons (in addition to the Athabasca Tar Sands such as shale oil, heavy oil, deep offshore oil, etc.). So too, the potential reserves of natural gas, especially offshore gas are real wild cards in these scenarios.

Nonetheless, The CIBC report is a sobering reminder that oil prices are on the rise and that we all had better be prepared for significant shocks to the economic scene - personal, national and international.

The report is available here.

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Source: CIBC World Markets