What happens when America doesn’t need Canada’s oil? – by Michael McCullough (Canadian Business Magazine – February 27, 2013)


Time to find a new buyer.

When Alison Redford was forced to admit last month that her province was running short of cash due to low oil prices, it was frightening for Alberta and worrisome for the entire nation.

For the past decade, Canada has thrived on the good fortunes of the oil and gas industry, but those times, Redford made clear, are coming to an end. “Because of the rapidly growing levels of oil production in the United States and the fact that we’ve virtually nowhere else to sell our oil than the U.S. market, Alberta is getting just over $50 a barrel for our oil,” Redford said. “This bitumen bubble means that the Alberta government will collect about $6 billion less in revenue this year alone. To put that in context, that’s equivalent to all of our government spending on education each year.”

Redford’s fireside chat was intended to prepare citizens of her province for service cuts and possible tax increases expected on budget day, March 7. But the bitumen bubble’s effect will reach far beyond the borders of the Wild Rose Province. Two weeks after Redford’s remarks, federal Finance Minister Jim Flaherty told reporters lower government revenues follow from lower commodity prices like “night follows the day,” meaning a hard line of spending as he approaches his own coming budget.

The price drop is an unexpected turn of events for an industry that for decades has operated under the assumption of Peak Oil—geophysicist M. King Hubbert’s theory, first proposed in 1956, that the United States’ then soaring oil production would peak and begin to decline around 1970. Hubbert was proven right within the century in which he lived. U.S. petroleum output peaked at 10 million barrels per day (bpd) in 1970, declined slightly, rose again in the 1980s as a result of the Prudhoe Bay discovery in Alaska, then declined again to around five million bpd in 2006. Over the same period, American oil consumption steadily grew—to more than 20 million bpd in 2007—with a larger share every year provided by imports.

Blessed as we are with the world’s third-largest oil reserves, Canada’s mission was to help fill America’s growing gap between domestic supply and demand. All Canadian producers, already integrated into the U.S. market, had to do was finance exploration and development, and produce oil at market price, or even below it. Little thought was given to things like developing new markets or expanding distribution.

Unfortunately, that has left Canada’s largest export industry ill-prepared for a world in which Hubbert’s peak, at least in the short and medium term, no longer applies. American domestic production has been rising since 2006, thanks to innovations in extraction techniques that have enabled producers to get blood from stone in places like the Bakken formation in North Dakota and the Eagle Ford shale bed in Texas.

At first gradual, the uptick is picking up speed; U.S. oil output rose three-quarters of a million bpd in 2012, the largest single-year increase in history. At the same time, consumption has been falling due to a still-sluggish economy, improved vehicle fuel efficiency and changing driving habits. America’s need for imports is falling accordingly.

For the rest of this article, please go to the Canadian Business Magazine website: http://www.canadianbusiness.com/economy/what-happens-when-america-doesnt-need-canadas-oil/

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