. . . CERA analysts expect global markets to remain tight "with exposure to potentially sharp price upswings—even in response to small, unexpected disruptions in refinery operations."

Inventories of refined products are critical when markets are constrained by a lack of spare refining capacity, CERA notes. "Gasoline and distillate inventories in the US are not particularly flush, foreshadowing tight oil supplies this summer."

Margins for light products are expected to remain well above historical averages during 2006-07, higher than even 2005's soaring levels, for a number of reasons, CERA says, including:

-- Rising wages, shortages of skilled labor, and inflation of costs for other key services and construction materials, such as iron, steel, and cement, are likely to raise costs and delay refinery expansions.

-- Economic incentives for some refinery expansions may be stifled by the policies of China and several other developing countries, which are interfering with the market by initiating price controls on refined products and creating subsidies.

-- Midwest refiners in the US, however, may upgrade facilities in deep conversion projects to refine extra-heavy crude from Western Canada as Canadian producers seek outlets for their crude and develop strategies to produce hydrogen to improve its quality.

-- Proposed new heavy-oil refinery projects in the Middle East likely will go forward to ensure markets for national oil companies' heavy crudes, meet growing demand for area transportation fuels, and reestablish an influence on global benchmark crude prices.

In his analysis, Hamilton goes on to note that the quality of crude being produced, particularly by the Saudis, is steadily declining, which is in turn causing increasing bottlenecks and costs in the refining process. "Peak oil", Hamilton observes, is not a sudden discovery that oil supplies are depleting rapidly. Instead, he says, it is a

more gradual process in which we continually pay more for oil, trying to extract lower quality stuff from harder-to-get-at locations and with increasing geopolitical risks. When asked, "what will peak oil look like?", my answer has been, "perhaps a lot like the last two years".