The real price of oil, based solely on global supply and demand, may be as low as US$30 a barrel. That means about half of its recent US$60-a-barrel price is the result of concerns about production and refining capacity, and fears of supply disruptions because of terrorist attacks or other political developments.

Energy analysts place great importance on the real price of oil. It indicates where oil prices will head and what energy projects — involving either oil or myriad alternatives — are likely to get the go-ahead because they will probably provide a good return on the capital invested. That price is considered a floor, however, and the market price can be above it for long periods.

The Canadian Energy Research Institute in Calgary estimates the real price is a slightly less than US$30 a barrel, says Vincent Lauerman, global energy analyst. The estimate is derived by comparing the present market with that of 1996-03, a period of time in which the geopolitical environment was, for the most part, benign.

Another way to look at the real price is to take the marginal cost of the most expensive oil being produced, which the CERI estimates at US$32-US$35 for Canadian oilsands, and then add US$3-US$7 for the price of carbon permits. That would bring the real price to US$40 and the premium to US$20.

Fred Sturm, chief investment officer and resources portfolio manager at Mackenzie Financial Corp. in Toronto, also puts the real price at US$40 a barrel. He says the premium is split 50/50 between lack of spare capacity and concerns about supply disruption.

Other analysts say the real price is higher. Nick Irish, portfolio manager at London-based HSBC Halbis Partners, says it is US$50 a barrel. Oil is now being priced at marginal cost rather than average cost, he says, noting smaller U.S. oil and exploration companies failed to make reasonable profits at US$40.

Mary Novak, managing director of energy services at Global Insight Inc., economic consultants in Boston, says the real price is around US$50-US$55. She predicts it will fall as new supplies come onstream and technology lowers production costs to US$45 in today’s dollars in 2010 and US$42 in 2020.

Dom Grestoni, head of North American equities and manager of Investors Group Inc. ’s Canadian Natural Resources Fund in Winnipeg, doesn’t see prices going much lower. He bases his view on relatively flat prices for oil futures going out three years, suggesting that buyers and sellers see no change in the balance of supply and demand. He also notes that oil companies aren’t hedging by forward-selling their output, indicating that they do not believe prices will go lower.

Don Robinson, principal at IFC Consulting in Virginia, won’t even hazard a guess at what the real price of oil is because price is determined every day by competition of worldwide companies buying crude and producing companies selling crude. If a huge new deposit were discovered today, the price would drop because supply would be perceived as exceeding demand. Because there aren’t good data on either the worldwide production or demand side, oil traders are hedging their offers on the high side, to make sure they have their positions covered.

No one knows exactly how much spare capacity the Organization of Petroleum Exporting Countries has, or how much will be consumed by new competitors in the global petroleum market, such as China and India.

Sturm expects the premium to continue. He assumes oil prices will be in the US$40-US$60 range into the next decade. Indeed, he expects the price will be US$50-US$60 in periods of good global growth and only drop to US$40-US$50 when there is significant slowing or a recession. As prices are now at the high end of his range, his estimate suggests some shrinking of the present premium because of his expectation of increased capacity.

Sturm’s theory is that Saudi Arabia doesn’t want to see the oil price at US$70 a barrel, a price that would prompt a search for alternative energy sources. He says the Saudis will produce enough oil to keep prices around US$50, a level that will not significantly slow the global economy.

Lauerman, on the other hand, says the premium will shoot up this year. The CERI’s forecast is for oil to average US$74 a barrel in 2006, with the “fear factor” increasing because it is only a matter of time before air strikes are initiated against Iranian nuclear sites and Nigeria’s ethnic problems boil over. These events will not necessarily happen this year, but, the CERI says, tension will rise in anticipation of them. There are also concern about Venezuela’s political climate.

@page_break@Sturm says security of supply is becoming a major issue and mayovershadow concerns about emissions for a while. Grestoni notes that hostages were taken on platforms for deepwater oil exploration off the coast of Africa and pirates have tried to land on the platforms. He says the industry is bracing itself for another year of hurricanes in the U.S., as well.

Given the security of supply issues, Lauerman says, major consumer nations will not be impressed with OPEC arguments that technology is making oil cleaner. They will want to use more secure energy supplies, such as natural gas and even coal. Scrubbers are now available to capture sulphur and nitrogen emissions. The U.S., China and India all have plenty of coal. Indeed, there are much more coal reserves than for oil or natural gas, and most countries have coal deposits. Coal is also much cheaper than oil and gas, despite a tripling of its price in recent years.

Irish says he does not see a big move to coal, particularly in the industrialized world, where many countries have signed the Kyoto protocol to reduce greenhouse gas emissions — at least until technology is available to capture carbon dioxide emissions from burning coal. A lot of work is being done on such technology, and there are expectations of its success in the near future. Captured emissions would be buried deep in the ground, and some can be used for enhanced oil recovery. In the meantime, Irish says, there will be a significant move to more nuclear electricity generation.

A problem with cleaner coal is that the developing world would probably not go to the expense of putting in scrubbers or emission-capturing technology when it is available. Incomes are quickly rising in countries such as China, India, Brazil and Russia, but it will be some time before they are high enough to make people want to pay a higher price for energy in order to reduce pollution.

Indeed, the developing world views erosion of the ozone layer from greenhouse gas emissions as a “Western problem” that should be paid for by the industrialized nations.

Without a major move to more coal, the world will be increasingly dependent on oil from the Middle East and North Africa (MENA), and we will all pay for it.

The International Energy Agency in Paris estimates US$17 trillion will have to be invested by 2030 to meet the projected 50% rise in global energy demand. Much of the additional supply would come from MENA, with oil production growing 75% and natural gas tripling.

The problem is that it is not necessarily in the best interest of many countries to increase energy production because they are making tons of money with current production. They would make less if greater supply lowers the price and depletes a resource they may want to preserve for the future. If the investment is not made, the IEA projects a US$52 price for oil (in 2004 dollars) in 2030, compared with US$39 a barrel if the investment is made.

Potential sources of economically viable new energy supplies outside OPEC are gas supplies in northern Canada and Alaska, the Canadian oilsands, deepwater oil and gas in the Gulf of Mexico and Alaska, and the large oil-bearing shale pockets in the U.S. All are viable at recent prices, but only the oilsands are in production.

Deepwater exploration in the Gulf of Mexico is ramping up, and there has been one significant find. There is only a pilot project so far in the shale pockets. Production of gas in northern Canada and Alaska is a few years away, as pipelines have to be built.

There is natural gas in Siberia, but that isn’t a politically secure environment. There are also oilsands in Venezuela, estimated at 100 billion cubic feet vs Canada’s 170 billion, but they are located in inaccessible and ecologically sensitive areas.

Such hurdles are why the IEA is talking about MENA. In the Middle East alone, there is still plenty of oil but there has been little exploration and development for years, so capital will be required.

The urgency to exploit all supplies, particularly those in politically stable North America, will depend on the pace at which energy demand grows and the degree to which industrialized countries encourage reductions in emissions and conservation.

Grestoni says it takes 10 to 15 years of strong economic growth for energy consumption to take off in developing economies. Consumption in China could triple or quadruple in the next few years, bringing it to two-thirds of U.S. levels, vs the current 25%. This pace of development could increase global demand for oil to 3.5% growth a year from the expected 2.5%. He doubts OPEC can crank up production quickly enough to cope with that level of demand.

On the emissions and conservation side, the U.S. is mandating low-sulphur diesel fuel by this June. The hope is this will result in enough of a reduction in pollution in densely populated areas such as Los Angeles, Chicago, New York and Houston that those cities will be able to meet air standards, says IFC’s Robinson.

And sales of energy-efficient hybrid cars that use a combination of electricity and gasoline or diesel are taking off now that high gasoline prices are making them more competitive.

The IEA ran a scenario based on implementing the G-8 plan to promote cleaner energy and combat climate change, agreed upon in July 2005. The G-8-based scenario showed emissions 30% higher than now by 2030, rather than the 52% higher in the IEA’s base case. IE