Viewpoint: Cheap gas is gone forever

Don’t look for any cheap gas prices in the near future and definitely not in the long term.

CIBC World Markets Inc. issued a report last week in which it said, among other things, that dwindling oil supplies and rising demand could result in $100 a barrel crude oil prices in the next five years.

“Tomorrow’s price hikes won’t be triggered by sudden supply disruptions like the boycott of 1973 or the Iranian Revolution of 1979,” CIBC analysts said. “Instead, they will follow the inevitable collision between surging global crude demand and accelerating decline in conventional crude supply” (Globe & Mail).

Also last week Goldman Sachs Group Inc. declared oil markets may have entered a “super spike” period, which could cause crude oil prices to soar to $105 a barrel.

At the same time, Federal Reserve Chairman Alan Greenspan and the Saudi oil minister were painting a rosier picture. Greenspan contended before an oil industry conference that oil inventories are growing, and the Saudi oil minister was saying his country would increase production to take up any slack in supply.

The Saudis have been selling that same song for more than two years, but have failed to produce any additional oil. The reason is that their production is at or very close to maximum. You can’t pump more than the most, and from here on it’s down hill for the Saudis.

Not only CIBC, but the International Monetary Fund took issue with Greenspan and the Saudi statements.

The IMF last week said China’s rising demand for oil and tight supplies with almost no spare production capacity will keep oil prices volatile through 2030. “In short,” said Raghuram Rajan, chief economist for the IMF, “it will continue to be a rocky ride going forward, with a wide band of demand surrounding high expected prices.”

Rajan said as living standards improve for China, India and other developing nations, oil prices will go up, especially for cars and trucks. The IMF said China, by 2030, will be using nearly as much oil as the U.S. is today. We consume about one-quarter of the world’s production.

The IMF, in its World Economic Outlook report, stated: “The oil market will remain tight in the coming years, and high and volatile oil prices will continue to present a serious risk to the global economy.”

Rajan said forecasts of very high prices per barrel of crude are not beyond reason. “To the extent that there is some kind of supply disruption, $100 a barrel does not seem outlandish,” he said. “Is it the most likely scenario? I think not necessarily. It depends on how the market evolves.”

The new report estimates world oil demand will grow to 138.5 million barrels per day (bpd) in 2030, compared with 82.4 million bpd in 2004. Demand for OPEC oil will more than double to a range of 61 million to 74 million barrels per day by 2030, according to the IMF.

Rising incomes in China means its ownership of motor vehicles will leap to 267 vehicles per 1,000 people in 2030, up from just 16 vehicles per 1,000 people today. In comparison, the U.S. is predicted to have 843 vehicles per 1,000 people by 2030, up from 812 per 1,000 in 2002 (

The International Energy Agency (IEA) has just raised its estimate of global crude demand for this year by half-a-percentage point to 2.2 percent. This is the third time the agency has altered its forecast and is the largest revision to date. It is likely the IEA will have to revise it again as some experts believe global demand will rise by at least 2.5 percent.

It is obvious that prices will have to rise to keep demand within the available supply. One million barrels a day is a very skimpy cushion of excess capacity in the system. Next year, demand will have to be cut by 3 million barrels a day, and prices will go up further in 2007 and beyond (CIBC World Markets).

The effects of peak oil on the economy have been marked. The economy slowed sharply in the first quarter of this year, according to the federal government, expanding at the slowest rate in two years as rising energy prices sparked inflation and reduced consumer and business spending.

Stock indexes fell, S&P’s 500-stock index by 1.14 percent and Dow Jones Industrials by more than 128 points.

“I wouldn’t panic at this point,” said Nigel Gault, chief U.S. economist at Global Insight, an economic research company in Lexington, Mass., “but I think we do have to get used to the idea that growth is going to remain substantially slower than in the earlier part of the recovery. Unfortunately, we will have to get used to seeing softer growth numbers as interest rates go up because of higher inflation.”

Higher energy prices have tossed a clinker into the expected pattern of growth (

From the May 4-10, 2005 issue

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