Echoing 2005, stormy weather is likely to mean further pain for motorists at the gas pumps during the coming driving season.
Jeff Rubin, Chief Economist and Chief Strategist, CIBC World Markets

Gas prices could hit US$3.50 per gallon or C$1.30 per litre this summer, according to a CIBC World Markets report issued today, entitled Drilling in Troubled Waters. Another severe hurricane season in the Gulf of Mexico this year, as forecast by the U.S. Weather Service, will likely severely hamper oil production in the Gulf and drive crude prices to record highs.

"Echoing 2005, stormy weather is likely to mean further pain for motorists at the gas pumps during the coming driving season," notes Jeff Rubin, Chief Economist and Chief Strategist, CIBC World Markets. "The resulting drag on disposable income is expected to contribute to slower performance from the economy in the second half of the year."

At today's retail prices, crude oil costs account for about 60 per cent of the retail price of a gallon of gasoline, up from just 47 per cent two years ago. With crude oil prices forecasted to increase by 10 per cent through the fall, combined with decreased production capacity and already lower than average inventories, the average nationwide retail price of gasoline is expected to increase to US$3.50 a gallon in the U.S. and C$1.30 per litre in Canada.

"With the potential loss of as much as 750,000 barrels per day of production from storms this season, we will see West Texas Intermediate (WTI) easily top its recent peak," adds Mr. Rubin. "We expect WTI to average US$78 per barrel by the fourth quarter of 2006."

Last year, hurricanes adversely hampered oil production in two ways. First, they led to huge production setbacks for new fields and construction delays for newly planned projects. Second, existing production was shut down, as was much of the industry's service infrastructure along the Gulf coast.

Domestic oil production in the U.S. will likely continue to struggle, as sea temperature anomalies are expected to lead to a severe 2006 hurricane season.

The report predicts that U.S. production will decline from about the current level of 7.3 million barrels per day to about 6.0 million barrels per day by 2010. While U.S. dependency on foreign oil is expected to grow, Canada is alone among its current suppliers as a country in a position to significantly increase oil exports to the U.S. marketplace, largely as a result of Canadian oil sands production.