Tuesday, October 02, 2007

Peak oil begins here

The screw is tightening.

As the main oil supply countries' own consumption of oil is rising, so they are exporting less. Oil prices are starting to rise. New sources are hard to get at.

Read on....

Six of the largest oil suppliers to the US are poised to cut their global exports by nearly 2 million barrels a day by 2012, ramping up pressure on supply and price, and intensifying the focus on one of the last great deposits open to private investment: Canada's oil sands.

The projected cut, amounting to 7% by Mexico, Saudi Arabia, Venezuela, Nigeria, Algeria and Russia, reflects the growing struggle in these countries to grow production and manage their own soaring rates of oil consumption, says Jeff Rubin, chief market strategist and chief economist, at CIBC World Markets, who will discuss his latest findings at the firm's Industrials Conference in New York City.

The trend of oil producing countries becoming major oil consumers extends beyond the top US suppliers, says Mr. Rubin.

When similar conditions are factored in among the other major oil producers including OPEC, the supply crunch deepens to 3 million barrels a day, or an 8% cut in global exports.

"Soaring domestic demand is cannibalizing export capacity, and will increasingly do so as productions plateaus or declines in many of these countries."

Last year, OPEC members, along with independent producers Russia and Mexico, consumed over 12 million barrels of oil a day, roughly 60% more than China and slightly more than all of Western Europe says Mr. Rubin.

As a group, they now are second only to the U.S. in terms of market size.

Much of the demand in these countries is driven by heavily subsidized prices that keep a barrel of oil down to a cost of between US$10 and US$20.

"The cheap supply is fuelling some of the fastest growth in domestic demand anywhere in the world," says Mr. Rubin.

Russia, now the world's largest oil producer, has filled the oil supply gap in recent years. However, internal demand there is growing at about twice the pace of production, and is claiming all of the country's production gains.

Mexico faces even great obstacles in maintaining its export levels.

Production in the giant Cantarell field, home to half of the country's 3.5 million barrels per day of crude production, is already in the throes of rapid depletion. With production diminishing and internal demand growing, the country's export capacity looks to be lethally challenged.

Mexico's crude exports have already been falling since 2004 and could well become insignificant by 2012 - a loss of some 1.5 million barrels per day to world markets.

Mr. Rubin says diminished global supplies and resulting higher prices will lead the markets to rely more on higher cost unconventional deposits, like the Canadian oil sands which he believes will surpass deep water wells as the single largest source of new oil exports by decade end.

"Canada's oil sands will become increasingly coveted as they represent one of the last great reserves of supply open to private investment," says Mr. Rubin.

He estimates they represent anywhere from 50-70% of the world's oil reserves open to private investment, depending on one's view of the investment climate in Nigeria and Kazakhstan.

"For multinational oil firms, the world is rapidly shrinking," say Mr. Rubin.

"Increasingly they are shut out of the backyards of all the state-owned oil patches and then have to bid against those state firms in places still open for investment.

"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."

Mr. Rubin's remarks were made at today's CIBC World Markets Industrial Conference where more than 50 big oil addicts - firms spanning the aerospace, defense, industrial services, chemicals, building products, steel, industrial multi-industry and industrial diversified sectors - are gathered to try and borrow more dosh from institutional investors.

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