Increasing destructive hurricane activity in the Gulf of Mexico will drive prices up and “deal lethal blow” to U.S. quest for greater energy self-sufficiency, predicts CIBC World Markets report

The resumption of the hurricane season in the Gulf of Mexico will see oil prices rise sharply in the second half of the year, predicts a CIBC World Markets report released today.

The report also finds the advent of increasingly destructive cyclonic activity in the Gulf, as predicted by many climatologists, will likely spell declines in Gulf production over the balance of the decade and increase U.S. reliance on foreign supplies.

“This drop will result in a big jump in U.S. oil dependency from a current level of 65% to an estimated 72% by 2010,” says CIBC World Markets chief economist Jeff Rubin. “In the short-run, production disruptions will likely see West Texas Intermediate establish a new record high crude price over this year’s storm season and average US$78 a barrel in the fourth quarter.”

The CIBC World Markets report examined the impact on production rates and planned capacity expansions over the balance of the decade in the Gulf of Mexico if climatologists predictions of increased cyclonic activity in the Gulf pan out. The report found the vulnerability of production in the region has not changed from last season and is not likely to improve over the next several years.

“In the longer term, hurricane disruptions will deal a lethal blow to America’s quest for greater energy self-sufficiency,” notes Rubin. “We predict Gulf production will average about 20% below the 2003 production peak over the rest of the decade.”

The CIBC World Markets estimate of 1.2 million barrels per day of production in 2010 is a million barrels per day lower than the most recent U.S. Department of Interior estimate. Together with continued depletion from on-land fields, total U.S. crude production will likely decline from 7.3 million barrels per day in 2005 to 6 million barrels per day by the end of the decade.

As a result, import dependency will rise from 65% to 72% over the period. Rubin notes that the study’s findings suggest that the route to greater American energy self-sufficiency, at least insofar as oil is concerned, lies with reducing demand rather than increasing domestic supply.

CIBC WM report

http://research.cibcwm.com/economic_public/download/mimar06.pdf

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