The fivefold increase in oil prices over the past decade has created boom times in Alberta, in North Dakota and in crude-producing regions across the globe, but the era of $100-a-barrel oil may be sowing the seeds of its demise.
Oil-consuming nations, such as the United States and China, have become preoccupied with security of supply, amid predictions of "peak oil" in which the global energy industry will have trouble keeping pace with rising demand.
But oil producers are increasingly worried about "security of demand." And none have greater cause for concern than those in landlocked Alberta. The crude they sell is some of the world's most expensive to produce, and they need a massive and politically-challenging expansion of pipelines to get it to global markets.
The bullish view is that higher global prices are here to stay. In this scenario, global oil use will continue to go up, and the industry will have difficulty replacing the depletion in existing oil fields – let alone meeting the rising demand from a billion Chinese who aspire to a middle-class life, and their compatriots across the emerging economies.
Then factor in the reality that much of the world's crude exports originate from the most politically-volatile region on the planet, the Persian Gulf. It's not hard to forecast $120 (U.S.) a barrel if Iran's nuclear ambitions result in continued political tension, or the price even spikes to $150 to $200 if those tensions escalate into attacks that threaten the key oil trade choke point at the Strait of Hormuz at the mouth of the Persian Gulf.
"I think, generally, oil prices are going to stay at historically high levels and the reason is the political risk around Iran," said Patricia Mohr, vice-president of economics and commodity market specialist at Bank of Nova Scotia.
The benchmark international crude, North Sea Brent, closed at $118.76 (U.S.) on Friday, while the North American benchmark, West Texas intermediate, ended at $103. Ms. Mohr forecasts that the price of both will go up from here, and stay high into 2013.
But other analysts are more focused on shifting supply and demand fundamentals – and those are less favourable to high oil prices. The International Energy Agency reported this week that global oil markets have turned the corner: Producers are pumping more oil just as consumers are constraining their use of it, easing concerns about shortages.
Energy economists at Raymond James Financial Inc. have dramatically cut their medium-term price forecast, citing eroding growth in demand and booming U.S. production from tight oil plays like North Dakota's Bakken.
The U.S.-based brokerage slashed its 2013 forecast for WTI prices to $90 (U.S.) a barrel from $105, and its long-term target to $90 from $125 (U.S.) a barrel. It also cut its forecast for Brent crude.
In part, the lower forecasts are the result of "demand destruction" as consumers adjust to $100 oil by driving less or buying more efficient cars. But the bigger story is the dramatic growth from U.S. and Canadian tight, light oil production, as companies adopt the drilling and hydraulic fracturing techniques that resulted in the shale gas revolution.
While the growth in production is a real phenomenon, Raymond James analysts have made a "mind-boggling" forecast: the U.S. supply will grow from 5.1 million barrels a day in 2010 to nine million by 2015. The additional four million barrels in production is enough to drive down global prices, analyst Alex Morris said.
And Raymond James is not alone in its bearish assessment of future crude prices.
Energy economist Phil Verleger said consumers across the globe are changing their consumption patterns in the face of triple-digit crudes prices, and that adjustment will have a significant impact on prices.
He noted that U.S. gasoline demand is down 6 per cent in 2012 from the corresponding period in 2011.
"Few forecasters have really gotten the message yet – that's almost one million barrels a day in global demand," said Mr. Verleger, who recently did a stint as visiting economist at the University of Calgary. "What that's doing is pulling down heavily the price of crude."
The economist said oil producers have long been counting on China to take up the slack from slower-growing developed countries, where oil demand is thought to be in permanent decline. But he said China faces major economic problems of its own, and he does not share the common view that it will enjoy uninterrupted, stellar growth rates.
"The question really is: Is China going to surge back and offset the United States? And I don't think they will," he said. "And if China doesn't surge back, then we get significantly lower prices."
Mr. Verleger said the floor price for crude really depends on OPEC, and particularly Saudi Arabia, which needs prices of between $90 and $100 to finance its ambitious economic program aimed at addressing social unrest.
While the Saudis will aim for a price of no lower than $90, they will occasionally flood the market to chase high-cost competitors – like Canada's oil sands companies – out of the market.
"I can see the Saudis letting it go to $50, maybe $70 – whatever it takes to put the oil sands in Alberta in jeopardy."