Financial Post:

Randy Ollenberger, managing director of oil and gas research at BMO Capital Markets, said global oil supply could decline by as much as 20 million barrels a day over the next three years if the oil industry stops investing new capital, whether by building new projects or sustaining existing ones, because oil prices are too low. This would dwarf a decline in demand of about 2.25 million barrels a day over the same period.

"The market is fixated on the demand side and ignoring the supply side, and if oil prices remain at these levels, what we will see is supply destruction that is much greater than the demand destruction than we have seen," he said after addressing the Calgary CFA Society 2009 forecast dinner on Thursday.

"In the 1980s and through the 1990s, we had lower prices for protracted periods because we had excess supply over that entire period. We don’t have that today," he said. "I think the turnaround here will be much, much quicker. Maybe not a turnaround in 2009, but by the end of 2009 we will see pretty clear evidence of the supply destruction."

Another forecaster who’s getting nervous about the world’s oil supply picture is CIBC World Markets chief economist Jeff Rubin. In a report to clients on Friday,he predicted another oil spike to US$100 a barrel toward the end of this year and into 2010.

Mr. Rubin argues the recession may temporarily cut one or two million barrels a day from world oil demand, but will do nothing to stop the loss of nearly four million barrels per day this year from depletion alone.

"No one is going to finance those money-losing mega-investments at oil prices anywhere near US$40 a barrel," he said.

We could always be surprised by an explosion of new, green energy to replace oil and keep supply and demand balanced at lower prices. Realistically, it’s unlikely the hype and hope will be matched by output anytime soon.

My Comment: You know my view that this demand and price drop is temporary and when demand comes back prices will exceed the old highs. And no green energy will not save us.

John Polomny
The Real Deal