Increasingly tight oil supplies will continue to push the price of oil higher with the cost of crude hitting US$150 a barrel by 2010 and soaring to US$225 a barrel by 2012, forecasts a new energy report from CIBC World Markets.

This will result in skyrocketing consumer gas prices in Canada with the national average price topping $1.40 this summer, $1.80 in the summer of 2010 and $2.25 by 2012.

The report finds that current oil production estimates produced by the International Energy Agency (IEA) overstate supply by about 9% since it counts natural gas liquids in its numbers. The report notes that natural gas liquids, while valuable hydrocarbons, are not a viable substitute for oil and cannot be economically used as a feedstock for gasoline, diesel or jet fuel.

“While natural gas liquids only account for 10% of total supply, they account for virtually all of the increase in petroleum liquids production since 2005,” says Jeff Rubin, chief strategist and chief economist at CIBC World Markets. “Stripping out natural gas liquids, oil production has not grown for over two years, which certainly goes a long way to explaining why oil prices have doubled over that period.”

Rubin finds that the global oil market is much tighter than the IEA forecasts. He believes oil production will hardly grow at all with average daily production between now and 2012 rising by barely a million barrels per day.

“Whether we have already seen the peak in world oil production remains to be seen, but it is increasingly clear that the outlook for oil supply signals a period of unprecedented scarcity,” adds Rubin. “Despite the recent record jump in oil prices, oil prices will continue to rise steadily over the next five years, almost doubling from current levels.”

The report also notes that while production increases are at a virtual standstill, global demand continues to grow. While demand has dropped in the United States nd other OECD nations, this has been more than offset by demand growth outside the OECD.

“Car purchases in Russia, for example, are exploding as U.S. sales stagnate,” say Rubin.

Car sales in Russia grew by nearly 60% in 2007, 30% in Brazil and 20% in China. During the same period, car sales declined in the U.S. and were flat in Europe. Transport fuels now account for half of the world’s oil usage, and have driven over 90% of demand growth in recent years.

“In order to accommodate more drivers on the road in Russia, China and India, there must be fewer drivers in the U.S. and the rest of the OECD. And so there will be. U.S. oil consumption is likely to fall by over two million barrels a day over the next five years as retail gasoline prices rise from their current $1.20 a litre mark to $2.25 a litre.

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/pdf.