Imported oil and the threat to our security

[Long in the tooth]

I believe the federal government tried to enforce a 'made in Canada' price for oil in the 70s and 80s.  This was Marc Lalonde's National Energy Plan.  Peter Lougheed fought that and won over the long haul, which is why Alberta is the richest province, because they don't have to share the wealth of natural resources when equalization is calculated.

Canada is no more than a collection of present day fiefdoms vying for more out of the central government than they contribute to it.  Like a perpetual motion machine, it can't happen.

 

[a_majoor]

Even if we were to resurrect the NEP through the Kyoto accord or other means, we would still end up paying a price. The artificial supression of fuel prices will drive up demand, while at the same time limiting the supply as producers get out of the game. Cheap gas will be rationed, or a black market will develop (only well connected Liberals will be able to drive, take an airplane etc.)

 

[a_majoor]

High Pump-Price Fairy Tales
Blame global supply-and-demand realities â ” not the enviro-whackos.

By Jerry Taylor & Peter Van Doren

So what's driving these high gasoline prices, which now average $2.22 across the country? Conservatives think it's largely a function of the chickens coming home to roost. In short, bureaucratic red tape, anti-growth environmental extremists, and â Å“not-in-my-back-yardâ ? community activists have long prevented new oil refineries from coming online. This in turn has starved the market of the gasoline and â ” viola! â ” record prices are the logical result.

It's a convenient story line for the Right. Unfortunately, the narrative is wrong.

How can that be, you might ask, when we're constantly beaten around the head with the fact that no new oil-refining plants have been built in the U.S. since 1976? The reason that no new facilities have been built is partly because it costs far less to expand production capacity at existing plants than it does to expand capacity by building new plants. And because existing refineries are ideally situated near oil terminals and pipelines, it's more convenient to increase capacity in those locations than to do so elsewhere.

But if that's so, how do we explain the facility shutdowns that have characterized the industry? After all, there were 325 oil refineries in the U.S. in 1981, but only 149 remain today. The explanation resides in the fact that we had a lot of refineries back in 1981 not because of market forces or the lack of environmental regulations, but because the government subsidized the existence of small, inefficient refineries.

Here's how it worked. Under the Mandatory Oil Import Quota Program (which was in effect from 1959 to 1973), low-cost crude oil imports were restricted to support the domestic crude price. Refineries got disproportionately more rights to import if they were small. The subsidies to small refineries continued under the price-control programs in place from 1973 through 1980. When the subsidies ended, a large number of inefficient small refineries bit the dust.

That helps explain why domestic refining capacity dropped from 18.6 million barrels of oil a day in 1976 to 16.8 million barrels of oil today. Dramatic improvements in the operational efficiency of oil refineries also contributed to that decline. Refineries now operate much closer to their capacity than 20 years ago. Accordingly, less â Å“nameplate capacityâ ? is necessary to meet demand.

The upshot is that even though domestic refineries have been shutting down and total refining capacity has been declining, domestic gasoline production has actually increased by 20 percent since the last oil refinery was built in 1976.

But even that figure only tells part of the story. Gasoline markets today are increasingly global rather than regional in nature. For example, European governments tax diesel fuels less than gasoline and European motorists have responded by using diesel. Accordingly, European refineries make more gasoline than they can use and it's cheaper for us to import that gasoline than to produce it here at home.

The increase in gasoline imports since 1976 (from 2 percent of the market then, to 5.8 percent now) is often cited as evidence that â Å“we have a problem.â ? Nonsense. International trade is a good thing. The more globalized the market, the more diversified our supply and the less vulnerable the U.S. market is to disruption. Moreover, the more global the market, the greater the competition. How much domestic refining capability we have is increasingly less important than the amount of international refining capacity we can access.

It is true that there is a little slack in production capacity at the moment. Why don't we have more production capacity? Because profit margins in the refining business have traditionally been rather meager. The gasoline refining market is about as close to the model of â Å“perfect competitionâ ? as you're going to find outside of an economics textbook. Rents are competed away and little profit is left for producers, especially when compared to the profits available from investment in oil production.

Conservatives believe that environmental regulations have a lot to do with those low profits. They're wrong. A large oil refinery costs $4 billion to $6 billion to build. The installation of â Å“best available control technologyâ ? is a very small part of that figure.

Accordingly, President Bush's proposals to provide low-cost real estate in the boonies and to somewhat reduce plant costs through regulatory improvements simply won't result in any new refining capacity. We'd love to blame big government and enviro-whackos for today's high gasoline prices (we do, after all, work for the Cato Institute). But telling fairy tales about the market does no one any favors. Prices are high because of global supply-and-demand factors, and Congress can do little about it.

â ” Jerry Taylor is director of natural-resource studies at the Cato Institute in Washington, D.C. Peter Van Doren is editor of Cato's Regulation magazine.
 
http://www.nationalreview.com/nrof_comment/taylor_van_doren200506030857.asp

 

[Long in the tooth]

So at what price point will demand be reduced?  It seems that in the case of gas, demand is almost inelastic - after purchasing a vehicle, paying over $5 per day for insurance, driving is still a bargain.  In my case, with three kids, public transit is not an option, just an illusion the loonie left (Nick? Nick? You there?) trots out to justify higher taxes. 

Taking my family 7km downtown on the bus costs $20.  I'll take the van, thanks.

Right now Manitoba has a comparative advantage as our electricity is cheaper than the rest of Canada.  Our Premier wants to build a transmission network to sell power to Ontario and the Ohio valley.  Once we start to sell power our prices will rise to North American levels and MB will lose.  It is unclear how NAFTA will affect that, but you can bet that the US will put a case forward that resources should be sold to the highest bidder.

The only thing that stops the US draining the great lakes dry are the US Governors that sit on the Great Lakes Commission.  You sure as heck know the Americans give two cents to what our premiers want.  The Governor of N. Dakota is pressing to have the cess pool called Devils Lake flow through the Red River into Hudson's bay.  He's quick to cite 'American' and 'US State' studies to hasten this, and hardly mentions that it's just gotten to the Great Lake's committee stage.

I'm not a fan of Mel (Hurtig) or Maude (Barlowe), but when it comes to our resources and the US, be very afraid.  They are great at playing the provinces and federal governments off against one another, always to their benefit.  Oil, gas, electricity and water?  Step right up, we'll expedite that!  Free trade go go go!  When it comes to our value added finished products like furniture, cars, aircraft, sugar, wheat or potatoes, it's a protectionist bully second to none in the world.

I've heard many Canadians say we should link trade of our finished products to that of raw materials.  Alberta won't go for it.

 

[tomahawk6]

And yet Canada is still able to generate 80% of its trade with the US - 20% with the rest of the world.

 

[Zipper]

That because Alberta sells very little beyond raw materials and so does not wish to be limited or penalized in any fashion. Hurt the rest of the country? Yes. But who cares beyond the borders of your own power base eh?

As for 80% trade with the US. Maybe we should diversify that some and not be so tied to the US.

Taking my family 7km downtown on the bus costs $20.  I'll take the van, thanks.

Ok this confuses me? 20 dollars? How much are they charging you for a ride? And are the buses not transferable at intersections? Something is wrong there. I can get from one end of the city to the next with the same number of people for much less in Toronto, and even Vancouver (across water even). So they must be conducting some form of highway robbery.

As for mass transit. I think the whole idea behind it is for larger cities to reduce traffic congestion and mover larger amounts of people with more efficiency. Of course this requires a larger city to work properly, which many cities in Canada do not qualify as. There are many other things that go into this, but its rather to long to list.

 

[GO!!!]

Ill second the statement about the cost of public transit in the west, having lived all over it. It is cheaper to drive with a family.

Tomahawk6's statement about Canada generating 80% of it's trade witht the US is correct, thanks to the provisions in NAFTA and GATT before it, which tied us more closely (in economic terms) to the US. This was a great idea when the tories concieved and actioned it, but with the US federal deficit growing beyond anyone's expectations and a major US economic correction on the horizon, Canada should really be developing other markets.

As for Alberta not selling much beyond raw materials, nice try, 68% of the petroleum that leaves AB is refined, despite the best efforts of the federal government to prevent the building of upgraders and refineries. Alberta should not be letting it's primary industries be tied to those of the east, as they are exempt from things like the Kyoto accord, and vigorously subsidized by the federal government in order to protect the FEDERAL power base! If the NEP as Trudeau had envisioned it had not been snuffed out by such western heroes as Peter Lougheed, Alberta would be producing the same amount of oil it does today, but would rely on transfer payments to survive as all of the benefit (money) would be sent to Ontario and Quebec.

In addition to this, comments about Alberta's wealth are misplaced in the area of natural resources. The average Albertan works 55hrs a week, the average Quebecker 37hrs and the average Ontarian 41. Might this have something to do with proportionate provincial wealth?

 

[squealiox]

The subject of this thread is exactly backward in the case of Canada, which is a net exporter of oil. Our problem is the fact we are tied too closely to a single foreign economy, the US. That is like holding a stock portfolio that consists of only one blue chip stock -- OK when it's earning a return, but not so clever when that stock moving downward. In fact it would probably be a firing offence if you were a fund manager.
Instead, we need to diversity our "portfolio" of export markets. That means aggressively pursuing trade deals outside of NAFTA, particularly throughout the Pacific region, and taking the initiative in the WTO. Only then could we ensure that we would be consistently selling our resources to the highest bidder, rather than simply the nearest.

 

[GO!!!]

The problem with this (diversification of markets) is that it is difficult to identify other international markets when presently, the US is the highest bidder. Only when the US loses the ablity to pay will diversification occur.

Having said this, the US imports 80% (give or take) of our export goods. We only absorb 15% of theirs. We need them at present far more than they need us. Thus any nationalistic tendencies towards diversifications will fail, as they can do irreperable harm to certain industries (beef, softwood lumber) with little or no repercussions for themselves.

Pacific rim market opportunities will only rise in the forseeable future, as their economies beome more diversified and industrially based. However, as this happens, the possiblility of the US pursuing an agreement on the export of Canadian energy under the aegis of a collective security arrangement becomes more possible. At the risk of sounding too alarmist, our great neighbor to the south regards the deprivation of petroleum markets as an act of war. This will become an issue now that world petroleum production has peaked. Saudi Aramco tapped it's last known resources at the end of March, putting world production at 100% of capacity.

The combined might of the WTO, NAFTA and the IMF will not protect us from further US exploitation.

 

[a_majoor]

China is busy buying oil and into Alberta oil companies (as well as coal, lumber, minerals and other Canadian resources), which gives us a very interesting situation, do we sell to the highest bidder (as economic theory teaches) or should we also tie our sales to larger geopolitical imperatives (China is hardly a friendly power).

That said, there is an entire world of customers out there, but the fault isn't in them, it is in our industries which would rather shelter under the Liberal skirt hems for concessions and hand-outs rather than agressively persuing markets in India, Lebanon, or dozens of other nations (Why are the only Canadian companies you see in our "peacekeeping" AORs Atco Frontec and it's satellites? You'd think we have built up a positive reputation in those places).

If companies in Canada and the US are content to just pick the low hanging fruit, that is hardly exploitation. Indeed, if you own a mutual fund or any other investment with the exception of local real estate, you would be screaming blue murder or dumping the fund if they didn't attempt to get the best return for the least cost.

Back to the first principle of this post; given the need for oil in the US and western economies, we should be in the catbird seat, since we are sitting on a trillion barrels of the stuff, and it is only hours away from the largest market on earth. Why should we NOT take advantage of this situation?

 

[GO!!!]

We should take advantage of this situation - but we should do it with our eyes open;

1. The US does not "need" us or our oil, we provide a drop in the proverbial bucket.

2. The oilsands are the most expensive oil fields on the planet to exploit, and we burn natural gas in order to extract the bitumen from the sand - gas is going up in price as well, as demand increases.

3. Not selling shares of companies to investors because they hail from an "unfriendly" nation is what makes international investors leery in the first place. We should be selling to the highest bidder - period. Selective sales only drive the price of the item down.

4. The reason you only see companies like Atco in PK AORs is that Canadian companies are prohibited from carrying out profitable actions in those countries by Canadian law. Look what happened in Sudan with Talisman Energy! They were profitable, but the feds did'nt like it, due to the half - assed reporting of a few obscure human rights groups with very vested interests.

5. The handouts that Cdn companies get are to offset the damage caused by such insanity as the Kyoto Accord and the Clean Air Act, which do nothing but harm our industrial base. - They only go for the low hanging fruit because the unions would prohibit the use of a ladder!

 

[clasper]

Saudi Aramco tapped it's last known resources at the end of March, putting world production at 100% of capacity.

That's an amazingly ridiculous statement.   There's exploration going on all over the world (including in Saudi Arabia).   If world production is at 100% capacity, how did we manage to produce more oil today than we did yesterday, and more oil this month than last month?   Rightly or wrongly, this trend will continue for some time.

Look what happened in Sudan with Talisman Energy! They were profitable, but the feds did'nt like it, due to the half - assed reporting of a few obscure human rights groups with very vested interests.

Economically propping up a genocidal government isn't so bad, but those Ottawa bureaucrats are truly evil- they want to stop Alberta companies from becoming profitable!

edit: I thought that last statement was sufficiently over the top that I didn't need to point out its sarcastic nature, but Zipper has asked for a clarification.  Actually, I believe that Ottawa bureaucrats are in fact less evil than genocidal governments.

 

[Zipper]

I'm going to have to question you on 3,4, and 5.

So your saying that we should sell to the highest bidder period without any other considerations period? Isn't that something akin to dealing with the devil without our eyes open?

And as for Talisman in Sudan? So they should be allowed to go about there business regardless of who their funding and where those funds are going? If cases like that were allowed, we would still have apartheid in South Africa.

Clasper, I hope you meant the "not so bad genocidal" comment as a sarcasm? Sheesh  :

And number 5. So we shouldn't have any sort of environmental protection at all? Just let business run ram shod over all? How about getting rid of all the labour laws as well?

I agree that we should be doing more business with countries in the pacific rim as well as else where, but we should also do it with our eyes open and our values intact.

As for my comments about most of Alberta's resources leaving as such. Yes they are refined, processed and what not, but they rarely leave if ever as a finished product. Ie. Oil does leave as gas, but it rarely leaves as say a finished plastic product. Wood doesn't leave as furnature but as lumber. etc... Thus we supply other industries outside with their raw materials.

 

[GO!!!]

That's an amazingly ridiculous statement.   There's exploration going on all over the world (including in Saudi Arabia).   If world production is at 100% capacity, how did we manage to produce more oil today than we did yesterday, and more oil this month than last month?   Rightly or wrongly, this trend will continue for some time.

Clasper

World production capacity is not a measure of how much oil there is in the ground, it is a measure of how well we are exploiting the oil that we have already discovered, and the percentage of active wells we have producing at 100% capacity. As the world is considered by most exploration experts to be approximately 98.7% surveyed for oil and gas reserves, this is not an "amazingly ridiculous statement" it is a fact, agreed upon by all of the major oil companies and geological scholars. A quick peruse of the Economist's last two editions will clue you in.

As world oil refining capacity is finite, this is also an issue, as no new refineries are being built in North America due to the powerful environmental lobby.

As to your question about how "we produced more oil than yesterday". We (as a global economy) were not operating at 100% capacity a month ago. Now we are. Please familiarise yourself with some of the terms I am using before referring to them as "ridiculous".

As to your statement about propping up genocidal governments, we do it accross the Middle East, in all of the oil producing nations, we bought Iraqi oil two  years ago and we buy Iranian oil now. We buy oil from Hugo Chavez (venezuela) and have troops at a logisitcal base in Tashkent, Tajikistan, where the president is busy killing and jailing all his political rivals. We maintain friendly relations with Syria, Jordan and Morocco, all of whom have massacred dissident ethnic groups in the last twenty years. Why was Sudan so different, and why was only Talisman forced out? If the Sudanese government was so "genocidal" why did the Canadian government just give it 170 million $ to help "develop" the country, but no troops to ensure it was used properly?

Zipper,
    If we choose to embrace global free trade we are OBLIGATED by treaty to sell to the highest bidder. Taking a lead in the WTO will cement this. Or we can pursue nationalisation of resources and face impoverishing ourselves.

We should have environmental protection, but the Kyoto accord only gurantees that our industries will send money abroad, making us less competitive, and our goods more expensive.

As fr getting rid of labour law, not getting rid of it, maybe just reign it in a little. When 35$/hr unskilled auto assemblers in Windsor strike for even better wages and benefits, and ford shuts down and moves the plant to Mexico, everyone loses. Most rational people would agree that big unions have become too powerful.

We do supply other industries with resources, but because these are far more marketable, and easier to sell as such. In addition to this, the unions and environmental regs fight the creation of most manufacturing plants and jobs, and thus make it more profitable to assemble elsewhere. In addition to this, there is not enough manufacturing capbility in Canada to finish all of the raw materials harvested in Alberta alone, so it is really a moot point.

 

[Acorn]

We maintain friendly relations with Syria, Jordan and Morocco, all of whom have massacred dissident ethnic groups in the last twenty years.

Friendly relations with Syria?

Also, what massacres are you speaking of? Hama in Syria? Jordan??

Acorn

 

[Zipper]

There have been many "massacres" in many of the countries we have dealt with. But to ignore them for the purposes of making money and being "competitive" is wrong whatever way you choose to look at it. Although does it happen? Yes.

Kyoto if handled properly would not make us less competitive. It would in fact make us go down the alternative/more efficient energy use (wind, solar, ethanol, hydrogen, etc.) route faster and enable us to be world leaders in such and thus more competitive. This of course would mean that we would actually be doing it properly (such as giving homeowners more incentives to better insulate their homes and become energy efficient). As for what that Liberal's are doing? I just shake my head and get a cold feeling down my spine.

Labour laws being reigned in? Maybe. Unions certainly need to be. They have become themselves the monsters that they once fought against. Although I certainly would love to see a union in wallmart if anywhere.

As for resources going elsewhere. I agree. moot.

 

[clasper]

Clasper

World production capacity is not a measure of how much oil there is in the ground, it is a measure of how well we are exploiting the oil that we have already discovered, and the percentage of active wells we have producing at 100% capacity. As the world is considered by most exploration experts to be approximately 98.7% surveyed for oil and gas reserves, this is not an "amazingly ridiculous statement" it is a fact, agreed upon by all of the major oil companies and geological scholars. A quick peruse of the Economist's last two editions will clue you in.

98.7% is an awfully precise approximation, and it's total hogwash, unless you count the most cursory look as a survey.  Why do you think American politicians are dying to start drilling in ANWR, off the coasts of Florida, Virginia, etc.?  Because they're sedimentary basins which have not been explored yet.  They may have been "surveyed", but we still don't have a good idea how much oil and gas there might be in those areas (if any at all).

Major oil companies and geological scholars rarely agree on anything.  I highly doubt they agree on your assertion that we've reached peak production.  I'd be surprised if you could find one major (or even an independent) that said that.

As world oil refining capacity is finite, this is also an issue, as no new refineries are being built in North America due to the powerful environmental lobby.

As to your question about how "we produced more oil than yesterday". We (as a global economy) were not operating at 100% capacity a month ago. Now we are. Please familiarise yourself with some of the terms I am using before referring to them as "ridiculous".

Right.  And next month, when we produce more than we did this month, will you revise your theory?  I haven't read the last two Economist issues, but I do have a few years in the oil exploration business.  I can assure you that the sky is not falling.  There are serious issues to be dealt with, upstream, downstream, and in between, but we aren't standing on a precipice.

 

[GO!!!]

Clasper,
    The precipce is already under us. ANWR and the sedimentary basins in shallow water are already surveyed. We already KNOW there is oil there. It was a matter of waiting until the price of oil became high enough for it to be worth it to extract it. 55$ a barrel for light sweet crude is definitely within this definition.

As for having reached peak production, I won't even justify that with a response, it's a fact, live it, love it.


The reason oil prices have take a quick climb in the last year is because it is a finite resource governed by the rules of supply and demand. Demand is up in Asia and North America, and is only predicted to rise. Supply is falling. This means higher petroleum prices, which is already happening.

Will footnote Syrian and Jordanian massacres later today.

 

[a_majoor]

Clasper,
    The precipice is already under us. ANWR and the sedimentary basins in shallow water are already surveyed. We already KNOW there is oil there. It was a matter of waiting until the price of oil became high enough for it to be worth it to extract it. 55$ a barrel for light sweet crude is definitely within this definition.

The market price of sweet crude will be the driving force behind any petro alternatives. At $55/bbl, heavy oil begins to look attractive. If demand increases (as it will), then even more exotic alternatives become feasible; oil shale (cooking carbon compounds out of rock) or even the conversion of coal to oil (similar to how Nazi Germany attempted to prosecute the war near the end, and one way South Africa managed to get around those sanctions during the Apartheid era.)

The reason oil prices have take a quick climb in the last year is because it is a finite resource governed by the rules of supply and demand. Demand is up in Asia and North America, and is only predicted to rise. Supply is falling. This means higher petroleum prices, which is already happening.

This is a bit hard to factor, there are also short term "spikes" and various political and "external" factors drive the market prices, such as the "terrorist" premium on Middle Eastern crude and various attempts to manipulate the commodities market such as evidenced during the last election in the United States.

Over the long term, as market forces become apparent, it will become economical to turn to alternative sources of oil, or even forgo oil altogether for alternatives like nuclear energy. Our problem is not so much that we will run out of hydrocarbon fuels, rather we could be overwhelmed by a short term shock without having the ability to move to a viable alternative (how long do you think it will take to replace Saudi crude with Alberta Bitumen or Tennessee coal oil?). Just like your stock portfolio, energy sources should also be diversified!

 

[Brad Sallows]

All we need is a National Oil Strategy (or perhaps a more widely encompassing Energy Strategy) to go along with our National Health Care Strategy and National Child Care Strategy and other National Strategies.

The National Government do real good making up that Strategy stuff.  Right?