Manager Views

The outlook for oil prices

A supply crunch seems almost inevitable

Canadian consumers think about oil prices every time they fill up their cars. To say the least oil prices have been volatile, hitting a high of $147 a barrel in July 2008, before falling back to the mid-thirties and then surging back over $100. In the commentary below Fred Sturm, who manages Mackenzie Universal Canadian Resource Fund, the largest natural resource fund in Canada, discusses the energy sector and where prices may be headed over the next few years.

What is your outlook for oil demand over the coming decade?

Sturm: “There are almost 2.5 billion people in India and China alone. Let’s assume that 2 billion of them want a more prosperous life and aspire to live at 1/3 of the American standard by energy as a proxy.

What that means is that we would have to take oil consumption from about three barrels per person in those countries to seven barrels per person. That’s an additional four barrels times two billion people, or an extra eight billion barrels a year. That’s what Saudi Arabia and Russia combined produce.

So, unless you can show me a shiny new globe where we’ve been hiding an additional Saudi Arabia and Russia, this is not going to happen. There simply is not sufficient production available to close the gap as the emerging world industrializes. Eventually higher oil prices will discipline us to find other ways do other things, get more creative or perhaps reduce our expectations as to how we might live.

What do you say to people who point out that there is spare capacity today and that oil prices are too high?

The answer is, “Yes, that’s true.” What we are doing is pulling forward the likely trend lines that are coming if the economy continues to grow around the world. In 2008, when the market collapsed, OPEC took out production to try and balance the market.

 They had a lot of spare capacity, which we’ve been absorbing, and we still have spare capacity. But if Libya doesn’t come back online and world demand continues to grow, we could tighten up by this time next year so that at the OPEC level we effectively have no more spare capacity.

We constantly hear about new oil. Are we finding enough?

No. Only in Brazil have we found a big new source. Saudi Arabia, Iraq, Brazil, Kazakhstan, Canada - these are the countries we’re hoping are going to produce more for the world’s needs. However, Saudi Arabia needs a lot of oil of its own and it doesn’t want to sell it cheap. I think they will put a little bit more into the system, but they haven’t got that much extra. Brazil has its challenges. It’s going to go deep offshore. Canada looks very good to us still as a secure base.”

What’s your outlook for oil prices?

We expect oil to trade in the range of $90-100 a barrel in 2011. Today’s markets are relatively in balance, with inventories at healthy levels and supply meeting demand.
 An oil price of $80 a barrel would be too low to give the incentive for meaningful production to come on line, and a price of $130 a barrel would cause people to cut back on their consumption.

What is your broader outlook for resources?

Never before has the world needed as much oil, as much iron ore, as much coal, as much natural resources as today because the global economy is at an all-time record high. To take advantage of this growing demand, our advice is that you talk to your financial advisor and maintain exposure to a diversified investment in resources.