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$7-a-gallon gas, 10-million fewer cars: Rubin

Globe and Mail Update

Thursday, June 26, 2008

A new forecast calls for gasoline prices to hit $7 (U.S.) a gallon in the next two years and oil to soar to $200 a barrel by 2010.

The report by CIBC World Markets also predicts there will be 10 million fewer cars on the road in the United States by 2012.

“Over the next four years, we are likely to witness the greatest mass exodus of vehicles off America's highways in history,” Jeffrey Rubin, the lead author, wrote in Thursday's report.

Economist Benjamin Tal, who co-authored the report with Mr. Rubin, said Canadians can expect to pay about $1.85 to $2.00 per litre of gas at the pumps by 2010.

Mr. Tal also expects the numbers of Canadian vehicles on the road to drop by 700,000 by 2012 – much less than the 10 million predicted in the U.S.

“We don't have the same story in the sense that most low income Canadians have better access to public transportation,” he said, referring to the report's U.S. calculations that estimates that about half the cars coming off the road will be from Americans who make less than $25,000.

In Canada, the decrease will be mainly come from middle-class families that own two or three cars, Mr. Tal said.

By 2012, the report predicts, the average miles driven in the United States will decrease by 15 per cent, and sports utility vehicles, which accounted for almost 60 per cent of U.S. market share in 2006, will drop to less than half that level. Overall vehicle sales will drop from 14 million to 11 million by 2012 – the lowest level since the early 1980s.

“While some of the current weakness in vehicle sales can be attributed to the economic slowdown, we estimate that highest gasoline prices have had almost twice the effect,” Mr. Rubin and Mr. Tal wrote.

Basic laws of supply and demand are “no longer operative” in the crude oil market, the report says, compelling CIBC economists to raise their target for West Texas Intermediate by $20 a barrel, to $150 next year, and by $50 a barrel by 2010, for $200.

“Higher oil prices spell stagflation for the U.S. economy next year, and we have marked down our GDP growth to barely over 1 per cent for 2009,” Mr. Rubin wrote.

The report also predicts that by late next year, gasoline sales in the United States, growing at a rate five times that of the rest of retail sales, will overtake grocery store spending as the largest item in households' non-vehicle retail spending.

All of this means a “quantum” shift in driving habits, the report says. Americans will drive less in smaller vehicles, perhaps mimicking countries in Europe where fewer people drive their cars to work than in the United States.

(In the United Kingdom, the report says, 60 per cent of people use cars to get to work compared to the more than 90 per cent of Americans.)

“Of course the flip side to this equation is public transit,” wrote Mr. Rubin and Mr. Tal. American “obsession with the car is mirrored in its avoidance of public transit.

“When it comes to taking the train, bus or subway, the U.S. ranks the lowest among OECD countries, just as it ranks the highest among the same group when it comes to the use of the car,” the economists wrote.

Earlier Thursday, Organization of Petroleum Exporting Countries president Chakib Khelil said in an interview that crude could rise as high as $170 a barrel this summer.

“I forecast prices probably between $150-170 during this summer. That will perhaps ease towards the end of the year,” he told France 24 television, according to a text of the interview released by the station.

The comments came as crude prices neared $135 per barrel, after rising about 40 per cent this year.

Mr. Khelil said he doubted prices would climb as high as $200.

“I think that the devaluation of the dollar against the euro, if everything goes as I think it will, will be of the order of perhaps 1-2 per cent and this will probably generate an $8 rise in the price of oil,” he said.

Mr. Khelil said it had been clearly established that speculation was affecting markets.

“It's not a question, but a certainty. The problem is the extent of that speculation on the market,” he said, adding that the effect of the subprime crisis in the United States had affected oil markets.

With files from Reuters

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