Jeff Rubin explains why the end of cheap supply means the end of easy answers to renewing prosperity—and the end of globalization as we now know it. Rubin was the former Chief Economist at CIBC World Markets is a frequent columnist for The Globe and Mail, and is the bestselling author of Why Your World Is About to Get a Whole Lot Smaller and The End of Growth. Jeff addressed the current Oil Sands issue in yesterday’s Globe and Mail:
Shipping oil across Canada to the Atlantic coast, as TransCanada proposes to do with its Energy East project, is hardly the industry’s first choice. Taking oil south to the Gulf coast via Keystone XL or west through British Columbia are clearly more expedient options. Still, it’s no surprise to see Energy East jump ahead in the queue, given the public and political opposition facing the other routes.
What will be surprising is if Quebec embraces the proposal. This is a province with enough environmental mettle to turn its back on drilling for potentially rich shale gas reserves in the St. Lawrence Valley. The tragedy at Lac-Mégantic, it goes without saying, also puts the business of moving oil into the public consciousness as never before. Does Quebec really want more than a million barrels of oil coursing through its territory every day? Better yet, should it?
To be sure, there are some economic enticements. Refineries around Montreal and Quebec City can be supplied by Alberta oil, instead of relying on imported crude. And, of course, the well-paid construction jobs that accompany big infrastructure projects can’t be overlooked.
That said, Quebec’s refineries aren’t exactly in desperate need of new supply. Sure, Canadian oil had been trading at a big discount to world oil prices. But the so-called bitumen bubble has now popped. The price gap between Canadian and world oil prices has shrunk as more oil has been loaded on to train cars, and smaller pipeline projects in the U.S. have helped siphon off the backlog of crude piling up in the Midwest.
As more pipelines are built around North America, including potentially Energy East itself, the more that price discount becomes just a memory. In other words, if Canadian barrels are trading at the same price as imported oil from the rest of the world, refineries in Quebec will be mostly indifferent to where they get their feedstock. Construction jobs, meanwhile, are nice, but temporary.
The benefits of a new pipeline, for the most part, won’t extend to domestic oil consumers either. If Energy East were displacing expensive imported fuel with a cheaper homegrown alternative, that would be one thing. But that’s not the case.
Whether the oil carried by Energy East is consumed in Canada or shipped abroad, it’s not going to lower the price of crude. Alberta’s oil sands bitumen is among the most expensive sources of oil in the world. Even if a west-east pipeline eliminates the need for Quebec to import oil, drivers in Montreal won’t pay any less at the pumps.
The oil we’re now pulling out of the ground in North America, whether from the oil sands or shale rock in North Dakota, is tough to get at. In the oil business, hard-to-get equates to costly. If oil reserves were easy to tap, oil prices would still be at $20 instead of $100.
Proponents of Energy East say the project is in Canada’s national interest to build. Why is that, exactly? Drivers in Ontario, Quebec and the Maritimes will still pay the same price for gas. The clear winners will be Alberta’s oil sands players. The Irving family, who are building the export terminal in Saint John, also get a check mark. New Brunswick, as well, will gladly take the boost from the economic activity. But there’s another side to the ledger that shouldn’t be ignored.
Oil sands production has already doubled in the past decade to around three million barrels a day. That kind of production kicks off a lot of cash to Alberta, as well as Ottawa. Industry sees output going to five million barrels a day by 2030. But are more barrels from the oil sands automatically in the national interest?
A troubling incident unfolded over the past month at a thermal oil sands play operated by Canadian Natural Resources. As the underground formation was heated up to allow oil to be extracted, thousands of barrels of bitumen began unexpectedly seeping to the surface. The affected area spanned 20 hectares.
What is the cost of chasing exponential production growth from the oil sands? Should we at least consider taking a few deep breaths before plunging ahead with loading more rail cars with oil and building more pipelines? Nature put that oil in the ground. Until we better understand the ramifications of taking it out, maybe we should think about leaving it there for a while longer.