DOING SOME DIGGING – What’s up with oil prices

Just when we thought US$50/bbl was a high price for oil, along comes a natural disaster to knock some sense into us...


Just when we thought US$50/bbl was a high price for oil, along comes a natural disaster to knock some sense into us. Hurricane Katrina blew through the Gulf of Mexico this week and effectively shut down a quarter of the U.S. oil and natural gas production. In her wake, crude oil prices have soared to about US$70/bbl. That's good news for producers (including the oil sands) and bad news for consumers heading into another heating season.

Canada is fortunate to be home to the Athabasca oil sands, which will provide an estimated 50% of our national oil & gas production in 2005 (and 10% of the total North American output). The producers are spending billions of dollars to expand existing operations, and projects that have been on the drawing board for a decade or more are finally going ahead.

Canada is the world's third largest natural gas producer and ninth largest crude oil producer, according to a presentation made by the Canadian Association of Petroleum Producers at the September 2004 Woodrow Wilson Forum on Energy Infrastructure. (It may be read at The United States imports more oil and gas from Canada than from any other country in the world. Fifteen per cent of the gas and 10% of the petroleum consumed in the U.S. come from north of the 49th parallel. Our reserves of crude oil are second only to those of Saudi Arabia.

This country is in the enviable position of having what our southern neighbour needs so much of.

I have repeatedly heard the suggestion that Canada cut off oil to the U.S. for its failure to remove duties on our softwood lumber exports. That would get their attention, proponents say. It won't work, and here is why.

A very large chunk of Canadian crude oil is sent via pipelines to the United States where it is refined into gasoline and then sold back to Canadians. We don't have the refining capacity to be independent of this north/south trade. Anything Canada does to boost the price of oil to U.S. refineries will only come back to haunt us at the gas pump.

Canadians have to expect that high oil, natural gas and gasoline prices are here to stay. They may not remain at US$70/bbl (we sincerely hope not), but neither will they drop back to US$30/bbl any time soon. We are going to pay more to fill up our cars, heat our homes, produce consumer goods and mine minerals.

The best course of action is summed up in the CAPP report mentioned earlier:
► Provide secure market access by supporting market-based development, expanding pipeline and refining capacity, and resisting the temptation to link oil & gas exports to other trade issues.
► Provide access to resources through improved regulatory efficiency by reducing federal-provincial overlap and duplication.
► Foster global competitiveness by recognizing increasing price pressures, supporting NAFTA and deregulation, and taking a North American view of research and labour.

I imagine the same approach would benefit the mining industry, too.

This might also be an opportune moment to turn up the crank on developing energy sources not dependent on petroleum and natural gas. Alternative energy used to be considered expensive, but I'll bet that view has been tempered by US$70/bbl oil. Whether or not the petroleum industry experiences more natural calamities like Katrina, there is no doubt that the cost to exploit and refine conventional oil and gas, including oil sands, will continue to rise until it is higher than some methods still on the drawing board.


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