Enduring Gas Pain

Some days it doesn't pay to get out of bed. Just ask TD Bank's economists.

Last week, they predicted that the price of a barrel of oil would drop to $45 US next year. Same day, bang! Stock prices soared and oil closed at a record high of $76 US.

Unfortunately for economist Derek Burleton's team, Israel started reprisals against Lebanon almost simultaneously with the report's release. That was enough to revive fears of diminishing supplies in the market.

This being said, TD isn't alone in projecting lower crude prices in coming months. Meanwhile, some still say the price will hit $100 US per barrel.

So who's right? Where is black gold heading: $45, $70 or $100 US?

At $70-$75, those backing the lowest proposition say oil is at a level that fundamentals can't justify.

The market should no longer worry about a possible scarcity of supply -- production exceeds demand by 1 million barrels per day according to TD's estimation. U.S. crude oil supplies are at a level not seen in eight years: 9% over the seasonal average.

On a global basis, there now is enough oil above ground to cover the Organization for Economic Co-operation and Development's demand over a 54-day period.

We were at 51 days last year, and the comfort zone is said to be between 54 and 56 days. In the past when we were at those levels, the barrel price fluctuated between $20 and $30.

SLOWING U.S. ECONOMY

Not convincing enough? Let's continue.

Over the past two months, while those inventories accumulated, the U.S. economy has performed extremely well. But now it seems about to slow down.

From 3.5% in 2005, U.S. GDP, or real growth, should be 2.5% in 2007, and should adjust the world's GDP growth from 4.8% to 4%.

So, if supplies accumulated while the good times were rolling and the global economy grew 15% faster than what's happening right now, there's a strong chance inventories would grow even more when we apply the brakes.

OPEC should certainly rein in some capacity to balance things out, but by doing so fears of a shortage will disappear, driving prices down.

Those expecting higher oil prices aren't really challenging their opponent's numbers. The difference comes from the analysis horizon.

Unlike the $45 supporters who look at the short-term picture (2007), they're going long: 2010. Their reasoning is simple: Although we can experience a period of surpluses, the equation is unfavourable in the long term.

A general trend suggests supply can't meet demand unless prices continue to increase to slow it down.

In 2005, Jeff Rubin, a strategic economist at CIBC World Markets, forecasted that demand for oil will increase by 2.5% per year until 2010, reaching close to 95 million barrels a day.

Taking into account the petroleum projects under development, the supply should only be able to provide 87 million.

See why prices will have to increase in order to depress demand? That's why $100 isn't out of the question.

True, over the past 25 years, demand only grew by 1% per year. But this was before China, which is still in its early days of consumption, became a major player.

In the long term, we seem trapped. Even more so with recent news concerning Alberta's bituminous sands that suggests substantial increases in construction costs will prevent some projects from coming into being.

In the shorter term -- over the next few months -- we could, however, witness a temporary decrease in prices. Probably somewhere between today's price and TD's target of $45.

Cuban Oil Renews Embargo Debate

A Canadian firm is among the companies whose move to drill for oil along Cuba's coastline has raised the eyebrows of oil executives -- and given energy-thirsty America pause to reconsider its 45-year trade embargo against the Communist country.

Canada's Sherritt International Corp. has exploration rights in four of the 59 deep-sea blocks that the Cuban government created in 2005.

Cuba created the blocks after a report by the U.S. Geological Survey confirmed the North Cuba Basin held up to 9.3 billion barrels of crude oil and up to 21.8 trillion cubic feet of natural gas. Companies from Canada and China had already been prospecting for oil in Cuban waters.

The fields have rawn the interest of companies from China, India, Norway, Spain, Venezuela and Brazil, but the U.S. is cut off due to the embargo.

Kirby Jones of the U.S.-Cuba Trade Association in Washington, D.C., says Cuba becoming a big-time oil producer makes the embargo too costly for the U.S. to maintain.

Our choice is: Are we going to let those other countries take that oil? Or are we going to look at our strategic interests and recognize that very close to our shores is a substantial quantity of oil that is going to be exploited?

In May, two bills were introduced in the U.S. Congress that would exempt Big Oil from the embargo.

That scenario, however could incense Cuban-American voters in Florida -- not exactly what U.S. President George W. Bush, or his brother, Florida governor Jeb Bush, would prefer three months before U.S. midterm elections.

Letting U.S. companies drill for oil off Cuba would damage our ability to press the Cuban government on other issues, such as human rights.

Shelling Out to Find More Oil

Shell Canada is going ahead with the first expansion of its Athabasca oilsands project, even though the company says it could cost as much as $12.8 billion.

Shell issued a formal proposal to its partners in Athabasca, including Western Oil Sands and Chevron Canada, with its plan to proceed. Earlier estimates said it could cost $7.3 billion.