25 April 2008

Black Gold, indeed

Crude forecast to reach US$225

Jeff Rubin, the ever-bullish oil forecaster and chief economist at CIBC World Markets, can't keep pace with crude's meteoric rise. Four months after predicting world oil prices will soar to US$150 a barrel by 2012, Rubin adjusted his outlook much higher Thursday - a day crude prices declined more than $2 a barrel as investors bolted from commodities - in a report that stands to drive North American bicycle sales through the roof. Rubin now says oil prices will average $150 in 2010 and an unfathomable $225 in 2012, with Canadian gasoline prices topping CAD$1.40 a litre this summer but skyrocketing all the way to $2.25 by 2012. CIBC's chief strategist has plenty of critics, but twice this decade he accurately read the tea leaves on oil's march past US$80 and $100. In January, the bank's investment arm studied the world's 200 largest new oil projects, including those in the Alberta oilsands, and concluded output from many will be slowed in the next four years by protracted delays and cost overruns, meaning many world supply outlooks are overly optimistic. The basis for Rubin's argument this time? In a report titled The Age of Scarcity, he said world crude oil production has not increased in two and a half years, but rather the supply increases reported by the likes of the Paris-based International Energy Agency have come from natural gas liquids. The trend will largely hold over the next four years and based on CIBC's assessment of proposed global oil projects now in the queue, roughly 50% of the increase in actual world petroleum production will come from NGLs, "leaving only small marginal gains" of real crude supply. "(The trend) is fine if you need to refill your lighter, but not so great if your gas tank runs dry," reads the report, which also says US gasoline prices will hit $7 a gallon ($1.85 a litre) by 2012 and notes that 90% of every new barrel of oil produced in the world today goes to transport fuels.

The report predicts growth in the sale of new vehicles like the $2,500 Tata and Chery models now being sold in emerging economies such as India, China and Russia means millions of new households will "suddenly have straws to start sucking at the world's rapidly shrinking oil reserves." It also says oil's continued rise and higher pump prices will force North American drivers off the road, and US oil consumption will fall by two million barrels a day as a result over the next five years. In an interview from Toronto, Rubin said a scenario of sky-high gasoline prices and a Canadian dollar continuing to rise against the US dollar will spell virtual doom for Ontario's auto sector. "Not only are you facing a shrinking market because you are not selling in China, India and Russia, but you are probably producing from a currency that is going to rise steadily against the US dollar," he said. Rubin said Alberta's oilsands will continue to grow in importance; Canada will become the provider of 30% of US oil needs, up from around 18% today.

Frank Atkins, an economist at the University of Calgary, who two years ago worked as a consultant to the Organization of Petroleum Exporting Countries, said Rubin's outlook makes sense on several fronts but contends Rubin is also selling a low-probability scenario that stands to benefit CIBC World Markets. He said Rubin does not give enough credit on the supply side of the equation to high crude oil prices pushing exploration and development of oil reserves that would not be pursued otherwise. "What we know and understand as economists are the fundamentals and you would be hard-pressed to find anyone right now to tell you the fundamentals say we should be at $116 a barrel," Atkins said. "I myself believe the pressure on oil should be downward but when it happens is anyone's guess. Likely when the US economy stops slipping, the US dollar finds its ground and people stop taking their money and buying oil futures as a safe haven."
(Calgary Herald, National Post 080425)

Well, Mr. Atkins, when have the economists been accurate a predicting future trends anyways? I've argued this with many people more versed in economics than me. They claim that theory trends acceptably well to reality, however I always argue that, firstly, there is never any fudge factor for the irrationality of human behavior, ever - that supply and demand elasticities simply follow predictable lines, especially in the short term is a fallacy. The market is as driven by psychology and sociology as it is by economics, therefore anything they predict ends up looking like a bunch of bunk. Economists are best explaining in hindsight why something went the way they did than being predictive. Secondly, economists have a vested interest in avoiding discreditation and maintaining status quo, therefore they continue to model in a theoretical world of infinite resource availability despite the obvious fact that we're bumping against many ceilings on many fronts due to our profligrate consumption model, and - the elephant in the room - the fact that there are way too many of us on a planet of finite sustainability.

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