Everything from manufacturing to transportation will be affected
Nicolas Van Praet, Financial Post Published: Thursday, April 24, 2008
If you think gas prices are bad now wait until the price of oil skyrockets to $200 a barrel. A CIBC economist says this is a likely scenario and will affect everything from gas prices to the manufacturing ...
Gasoline prices in North America will soar over the next four years to $2.25 a litre, causing a massive jolt to the continent's manufacturing base not seen since the oil shocks of the 1970s, a leading economist is warning.
Jeffrey Rubin, chief economist and strategist with Canadian Imperial Bank of Commerce, forecasts in a new report titled The Age of Scarcity that Canadians and Americans should brace for $2.25-a-litre gasoline, or about $7 a gallon, by 2012. That's nearly double the current nationwide average price for regular unleaded gas of $1.23. The price will top a record $1.40 this summer as it starts its climb, Mr. Rubin said.
As millions of people in emerging countries such as India and China buy their first cars in the months and years ahead, the economist argues, oil supply will fail to meet the new demand. And as they drive more, North Americans will drive less.
It is an eye-popping prediction from an economist who's been proven correct on his bold calls before. And it would have monstrous effects, widening the divide between Canada's have and have-not provinces and forcing up the price of anything that needs to be transported.
In the wake of the 1973 oil crisis, a 55-miles-per-hour speed limit was imposed on U.S. highways. Toyotas and Hondas became big sellers. And Alberta got rich. This time, Mr. Rubin said, hybrids will go "from marketing and PR fluff to the core of car production." People will move closer to where they work. And Alberta could get even richer.
"I think there will be fewer people on the road in North America in five years than there is right now," Mr. Rubin said in an interview Thursday. "For everybody who's about to get on the road by buying a new Tata or a Chery car in the developing world, someone's going to have to get off the road in this part of the world. There's just not enough gasoline to go around."
Gasoline, diesel and other transport fuels now account for over half of the world's oil usage and have driven more than 90% of demand growth in recent years, Mr. Rubin said in his report. By 2012, consumption of oil in the rest of the world will exceed that used by developed OECD member countries, he said, a nearly unthinkable prospect a little over a decade ago.
Global Insight, a major market research firm that specializes in the auto industry, estimates that for every $10 increase in the price of a barrel of oil, manufacturers of new vehicles lose 190,000 sales annually in the United States as people's financial priorities shift away from buying a new car. Based on Mr. Rubin's forecast that oil prices will soar to $225 a barrel by 2012, that works out to roughly two million vehicles that are not needed.
That's more than all the new cars and trucks sold in Canada annually, and about the same as all the vehicles Ford Motor Co. made at all its factories in the United States last year.
Automakers are not ready for this kind of dramatic change and would suffer a "huge blow" from it, said John Wolkonowicz, Global Insight's senior automotive analyst for North America.
"In the short term, it would create absolute hell," Mr. Wolkonowicz said, particularly for Ford, General Motors Corp. and Chrysler LLC. Detroit's carmakers would see more of their traditional profits from trucks eroded as consumers move quickly to more fuel-efficient cars, he said.
Transportation companies are already making major adjustments to respond to higher fuel prices. Airlines such as Horizon Air and Porter Airlines are choosing turboprop planes over jets. Railways are replacing older locomotives with more fuel-efficient ones. Carmakers have teams of engineers trying to cut vehicle weight and make better engines.
Oil at $225 per barrel would take those efforts to an entirely new level. But some see other solutions.
David Cole, chairman of the Centre for Automotive Research in Ann Arbor, Mich., argued the industry is at the edge of a revolution in fuels that will see cellulosic biofuel made from non-food sources become economically viable and come on stream over the next few years. "I think this is really going to dampen the speculation on petroleum."
Global Insight's own forecast calls for the price of oil to come down from its run-up near $120-a-barrel this week. "We're not forecasting that or anything close to [Mr. Rubin's prognosis]," Mr. Wolkonowicz said. "We're forecasting prices are going to come down because higher prices will spur more exploration."
National Post, with files from Scott Deveau
