Why Oil Is Headed Higher

Here’s a good Economics & Strategy Report from CIBC. On page 4, there’s a discussion of why oil prices are headed for another spike.

“But the potentially bigger and more lasting story is not demand destruction but how much potential new supply will be destroyed in the wake of the plunge in oil prices during the recession. While demand has, at least temporarily, changed, what hasn’t changed is the incremental cost of finding, developing and producing a new barrel of oil. That is running at about $90 per barrel for production from a new Canadian integrated oil sands mining and upgrading facility these days, four times what it cost to find, develop and produce a new barrel a decade ago (Chart 2). Alternatives, such as the ultra-deepwater areas of the Gulf of Mexico or sub-salt formations such as Brazil’s Tupi field require prices well above $60 per barrel to be economically viable.

“Nor has depletion changed. While the recession may temporarily cut a million or two barrels per day from world oil demand, it will do nothing to stop the loss of nearly four million barrels per day this year from depletion–particularly from the deepwater wells that make up more and more of world supply these days. The IEA has recently estimated that the industry will have to spend well over half a trillion dollars annually to meet future demand and counter depletion. No one is going to finance those money-losing mega-investments at oil prices anywhere near $40 per barrel.”

I’ve also talked about the enormous pressures weighing on the U.S. dollar. Once the dollar starts to fall, consumers will see soon the results at their local gas station.

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