Rising oil prices and the global oil equation

March, 2011

Why Canadian tar sands oil cannot insulate the U.S. from oil price shocks

The U.S. already imports over 2 million barrels a day from Canada. It did not protect us from rising prices in 2008, it hasn’t this time, and it never will.

The U.S. is already importing over 2Mb/d from Canada but this has had no impact on our vulnerability to OPEC and the current crisis in the Middle East. Oil is a globally traded commodity and price shocks such as we have seen this last month affect all sources of crude and all consumers more or less equally. Canadian oil has no impact on this effect as long as global demand continues to lead supply growth.

Most of the growth in imports from Canada has come from the Alberta tar sands, an expensive, high-carbon and environmentally destructive form of crude oil. Between 2003 and 2008, Canadian tar sands production experienced its greatest boom. The industry spent nearly $50 billion to raise production by a mere 350,000 b/d[i]. In 2004, Canada overtook Saudi Arabia as the U.S.’s largest source of imported oil. By 2009, imports from Canada were more than double those from Saudi Arabia[ii]. But during this time global oil demand grew 9Mb/d[iii]. Tar sands expansion did nothing to prevent the 2008 oil spike that saw gas prices exceed $4 a gallon and it has done nothing to insulate us from this latest price spike. There is little reason to believe that a strategy that has failed twice will work a third time around.

The evidence for Canadian oil’s failure to insulate this country from global oil shocks could not be better demonstrated than by the events of the past weeks. There is in fact a surplus of oil in the U.S. market today, evidenced by record inventories in the oil depot at Cushing, Oklahoma[iv]. EIA data from the past six weeks shows that U.S. oil supply actually rose in this period, as did stocks, imports and product exports.[v] Yet between February 18^th and March 4^th, the oil price rose nearly 22%[vi].  In the first week of March gasoline prices posted their biggest weekly hike since Hurricane Katrina[vii]. Tar sands oil did not ease the crisis as U.S. gas prices tracked the global oil price based on strong demand[viii]. The oil price only started to decline following OPEC’s announcement that it will increase supply[ix] and has since risen again as coalition forces took military action against Gaddafi[x].

Why Canadian oil cannot insulate the U.S. from oil price volatility

OPEC producers are not threatened by tar sands oil production or the pipelines that bring it to market[xi]. OPEC has 76%[xii] of proven global oil reserves and will always control the market no matter how much oil is produced elsewhere[xiii]. The International Energy Agency (IEA) forecasts that under the most aggressive non-OPEC oil development scenario possible, OPEC’s share of the global oil market still rises from 41% in 2009 to 52% by 2030[xiv]. This is because even with full development, non-OPEC oil simply cannot keep up with rising demand and the decline of existing capacity. Tar sands oil is included in the IEA analysis and makes little impact on the overall conclusion.

OPEC producers generally underinvest in their oil production capacity in order to maintain the highest possible price the market can withstand. When more oil is brought to market OPEC producers simply maintain their underinvestment policy keeping prices where they want them. If anything, by increasing non-OPEC supply OPEC producers are saved the effort and expense of investing in new capacity.

As with all sources of non-OPEC crude, Canadian oil supply maintains no spare capacity. The industry is highly capital intensive and is operated on the basis of maximizing shareholder return. Therefore it cannot afford to maintain underutilized production capacity that could be brought on stream in an emergency. In fact Canadian tar sands facilities generally operate at about 20% below nameplate capacity due to maintenance, downtime and incidents[xv].

Why Keystone XL won’t change this

There is no reason to believe that the proposed TransCanada Keystone XL pipeline will succeed in insulating the U.S. from oil shocks where the last two tar sands pipelines failed.

The reality is Canadian oil production is developing as fast as it physically can and the sector suffers from high inflation in its labor, equipment and services markets[xvi]. There is little scope for it to grow any faster. According to the IEA, growth in tar sands production to 2020 is unlikely to reach more than 1Mb/d over today’s figure[xvii]. Growth to 2035 could range from 1.5Mb/d to 2.8Mb/d over current levels[xviii]. In contrast, around 52Mb/d of currently producing conventional oil capacity will disappear due to depletion[xix], while global demand could rise between 13 and 22%[xx]. The idea that a few Mb/d of Canadian oil insulates America from this global oil equation is dangerously naïve.

Addressing oil demand is the only answer to America’s oil shock vulnerability

In the short term, the Strategic Petroleum Reserve could mitigate oil price spikes, as it was designed to do. But in the long term, we must reduce demand by increasing efficiency, switching fuel sources and reducing vehicle miles traveled. The result will be a healthier, more economically robust America.

According to the IEA, global oil demand could be reduced by 8% below today’s level by 2035[xxi]. This slashes OPEC revenues by $5 trillion and cuts US imports by 45%[xxii]. It would also reduce tar sands production by 28% because the consequent lower oil price undermines this expensive source of oil[xxiii].

Various studies have indicated that the U.S. can cut oil consumption even further than the IEA suggests. The EPA calculated that U.S. oil demand for transportation could be cut by 42% in 2035[xxiv]. Other studies show that 7Mb/d could be saved in 2030 over and above savings made by existing legislation[xxv], while the Rocky Mountain Institute, in collaboration with the Pentagon, proposed that oil use can be eliminated altogether by 2050[xxvi].

The promotion of Canadian tar sands oil as the solution to our vulnerability to OPEC is simplistic and opportunistic. Only by reducing demand for oil can the power of the OPEC cartel be curtailed.

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For more information contact Lorne Stockman, Research Director, Oil Change International at lorne [at] priceofoil.org.

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[i]Canadian Association of Petroleum Producers, Statistical Handbook 2009.

http://www.capp.ca/library/statistics/handbook/Pages/default.aspx

[ii] http://www.eia.doe.gov/dnav/pet/pet_move_impcus_a2_nus_epc0_im0_mbblpd_a.htm

[iii] http://www.indexmundi.com/world/oil_consumption.html

[iv] http://www.eia.doe.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=W_EPC0_SAX_YCUOK_MBBL&f=W

[v] http://www.eia.doe.gov/dnav/pet/pet_sum_sndw_dcus_nus_w.htm

[vi] Based on WTI closing prices on those days. Data from http://markets.ft.com/tearsheets/performance.asp?s=1070572&ss=WSODIssue

[vii] EIA, This Week in Petroleum. Accessed 08 March ,2011. http://www.eia.gov/oog/info/twip/twip.asp

[viii] http://www.theoildrum.com/node/7519

[ix] Javier Blas, Financial Times, 07 March, 2011. Opec members rush to rise oil output.

[x] Javier Blas, Financial Times, 21 March, 2011. Threat of drawn out war stokes oil fears.

[xi] Petroleum Economist, 30 September, 2010, Ethical oil and Opec

[xii] BP Statistical Review of World Energy, June 2010.

[xiii] Petroleum Economist, Op. Cit.

[xiv] International Energy Agency, World Energy Outlook 2010. P.120 This is under the New Policies Scenario.

[xv] Op. Cit. P. 154

[xvi] See for example: Nathan Vanderklippe, The Globe & Mail, 04 December, 2010. Re-energized oil sands faces labour crunch

[xvii] International Energy Agency, World Energy Outlook 2010. p.144. Current production is around 1.8Mb/d

[xviii] Ibid.

[xix] Op. Cit. p.121

[xx] Op. Cit. p.103, percentage growth based on 2010 demand of 87.8Mb/d according to IEA Monthly Oil Market Report Feb 2011.

[xxi] Ibid.

[xxii] Op. Cit. Pp.454-458

[xxiii] Op. Cit. p.144

[xxiv] EPA Analysis of the Transportation Sector: Greenhouse Gas and Oil Reduction Scenarios. February 10, 2010.

[xxv] Natural Resources Defense Council 2011. http://switchboard.nrdc.org/blogs/ltonachel/cleaner_cheaper_and_faster_why.html

[xxvi] http://www.oilendgame.com/