Sunday, September 2, 2012

Well that was quick and oil will probably go higher! Let’s thank Obama and the environmentalists

Remember the new world oil glut last July? Then, as a reminder of the nasty European crisis the oil price fell to around $80.00 per barrel similar to Oct 2011. Well oil today is quickly closing in on $100 per barrel.  I am talking WTI (Cushing prices). I wouldn’t be surprised if WTI is over $100 by Christmas.
Oops in Europe the oil the story is the same - only at world oil prices:

If you wondered about the economics of new pipelines and its importance to Canada let’s consider that Alberta’s export to the U.S. counts around 2 million barrels per day that are sold at a discount to world oil prices of $115 – 96 or at $24 per barrel. In the 1990’s most companies would have sold you an entire barrel for that $24!  At 2 million barrels a day that means $48 million PER DAY less in export revenue or 1.5 billion per month or $17.3 billion per year!! Now translate that into land sale revenues, royalties and corporate income taxes (not to mention into stock market gains) for Canada, Albertans and Canadians in general. Is anybody angry about the import tariffs imposed on our lumber exports?
No wonder Canada is trying to open new markets to capture these astonishing amounts of lost revenue!  No wonder we need an alternative to being held hostage to the U.S. refineries that put the discounts in their own pockets rather than into lower U.S. gasoline prices. And the environmentalists that were so eager to stop the Keystone pipeline now are confronted with the consequences of their actions.

The world needs oil and if it doesn’t go to the U.S. it will go somewhere else. It will go to refineries in eastern Canada via pipeline reversals and to Asia, in particular to the Chinese but also to countries such as Japan and Malaysia. How does it get there?  It will go through even more pristine environmental areas than some aquifer in the Mid-West. It will have to go through the mountainous areas of B.C. and it will be transported by train (much riskier than any pipeline) to refineries all over the U.S. To top it off, the U.S. will have to compete with numerous others that will clamour for Canadian oil. So long term the U.S. will have to pay higher prices and that translates into lower economic growth less jobs and less donations for said environmental groups.
Short term environmental thinking has done more harm than good. Just opposing a development at all costs does not throw off good long term results. Those same groups may get now even angrier at the establishment but in the end their impact will only be felt as a negative. Obama will look good in tomorrow’s election but in the long term he forced Canada to look to Asia and to implementing more hazardous environmental solutions to transport oil. He will have to keep importing oil from 'allies' such as Saudi Arabia and Venezuela. With friends like that who needs an enemy? What political leaders don’t do for a few votes!
In the meantime, we will be clambering for more oil to keep our lifestyle up and the oil industry will deliver oil from evermore difficult ‘reservoirs’ at ever higher prices. That is what the charts above tell us. In spite of low economic growth we will need energy; there is simply not enough secure supply. With the Middle East in shambles and Venezuela under-producing to satisfy the power hunger of its dictatorial leader the secure supply of oil is today even more precious than ever before.

Just imagine what our oil demand would be in a booming economy?  Well as pointed out before, oil prices and economic growth go hand in hand. Oil prices today are a stronger economic stimulant than interest rates which have been kept low artificially over the last 5 years by the U.S. Fed and other central banks with little effect.  You wonder about the quality of political leaders that have mismanaged such an important issue for a few more votes.

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