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How Low Oil Prices Failed To Stimulate The Economy

While higher discretionary income due…

Keith Schaefer

Keith Schaefer

Keith is the publisher of the Oil & Gas Investments Bulletin – an investment newsletter that looks at opportunities within the Canadian small cap oil…

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The U.S – Canada Oil Connection: A Different Perspective

The energy sector is a great example of how the U.S. and Canada can live side by side but be SO different.

Think of the phrase—Americans like to shoot guns, and Canadians like to dodge bullets.

In America, the “Shale Revolution” has turned the country's energy industry upside down, with huge new supplies of natural gas and light oil.  Once they found it, they went full-bore starting to produce it.? ?

In fact, in an amazingly short 4 years, America has reversed its 40-year decline in oil production.  Their entrepreneurial system made it happen; “only in America,” as the saying goes.

The Yanks have built drill rigs, oil pipelines, water pipelines, and brought back billions of dollars of petrochemical plants; secured rail to transport their crude all over the country—the American industry has shown itself to be remarkably agile and responsive.? ?

The world’s oil has been getting heavier for years—and so has the infrastructure to transport and refine it.  So the fact that US production increases are in light oil make theirs an even bigger transformation.?

Now, look at Canada trying to get its heavy oil to market—but only if you want to laugh.

In Canada, investors have been able to predict our rising heavy oil production for years.  There's an old joke: In the capital city of Regina Saskatchewan, you can watch your dog run away for three days, because the land is so flat—investors have had that kind of visibility on this heavy oil issue. ? ?

And here we are, years later, still beholden to the same one customer, and now we can’t even get all of our product down to them!  Canada has actually gone backwards in that respect.  That's why we're price takers and they're not, and why Canada is vulnerable to the low oil prices seen at Christmas 2012.?

Now, despite all our bumbling, Canadian heavy oil discounts are now quite low, meaning the price of our heavy oil is quite high—it was $80.95 in early April, a big jump from the $48 it was getting last Christmas. 

Related article: Are Canadian Oil Policies Misguided?

This is a GREAT price, and makes this drama mere entertainment, not a national tragedy anymore.? ?This is because Canada has adapted at least one way, and found a way to rail oil down to the US refineries—but it’s still going to only US refineries.? ?

But I can’t help thinking…the US has gone through a much greater upheaval, socially and economically, from the Shale Revolution than Canada has. ?

They have adapted better, adapted more quickly, than Canada has…at every turn. ??And there has been a lot of turns! And they keep coming!  Horizontal drilling, hydraulic fracturing over 300 feet, then 1000 feet, then half a mile, one mile, now two miles.

Suddenly full oil refineries, suddenly empty gas pipelines (it’s everywhere now, who needs gas pipelines?)—billions were spent on gas pipelines only a few years ago are now well under capacity.?

In the US, business just moves on, recognizing the new business reality.  Canadians use the National Energy Board to decide the best way to keep everyone from losing money.  It’s like Americans love to brag about how much they spent and Canadians brag about how much they saved.?

You see, nearly all Canadian oil pricing problems would be solved by getting one, just one, 1200 mile pipeline from the Alberta oil sands to the British Columbia west coast; from Fort McMurray to Prince Rupert.

But it has created a family feud in Canada that has dominated news headlines for well over a year.? ?Opposition against this west coast pipeline has drawn protests from environmentalists and First Nations, and even left-wing Canadian politicians.

In the US, build it, and they will come.  In Canada, build it, and they will protest.? ?Of course Uncle Sam agitating the locals under the guise of environmentalism doesn’t help, either. 

And don’t kid yourself, they are actively trying to keep Canadian oil for themselves; it’s well documented (stand by for a full feature story or three on that in the coming weeks).? ?

Related article: US Shale Industry Set for a Second Boom with Waterflood Technology

But oil is a global product, and it flows from areas of low price to areas of high price.

That's the whole point of pipelines—to get it to higher-priced markets. If the differentials remain wide enough for long enough, that oil WILL find its way to market—even if it has to be pulled by wagon.? ?

I don't think Canada is going to get backed out of the market, because somehow somewhere somebody is going to find a way to get that cheap oil. 

For example, I think we will get Canadian oil to Asia—but it will likely go through the Gulf Coast to get there, and get exported from there.   When I look at a map, I don’t know whether to laugh or cry. ? ?

But it’s interesting that a “national interest” seems to be building around the idea of—instead of doing a simple 1200 mile pipeline west—reverse an existing gas line that crosses two thirds of the continent to get western Canadian heavy oil to eastern Canada and refine it there.? ?

Hey, that could work, and make more of Canada feel part of the oil wealth that has such a huge impact on our country.  Quebec and New Brunswick refineries would finally get western Canadian crude, instead of from Venezuela. ?

The refineries would have to be expanded to handle our growing crude supply, as would port facilities.  It would involve huge infrastructure spending and create thousands of jobs in Atlantic Canada.? ?

It’s already well known that many of the oil sands workers are Maritimers, but it’s also true that the jobs in “Fort Mac” have saved rural areas across ALL of western Canada from big unemployment. ?

But that pipeline reversal won’t be ready until 2017 at the earliest—four years from now. 2017 is the best case scenario.?

America's gun culture is famous for the phrase, "Shoot first, ask questions later." Canadians are more prone to the phrase, "Ask questions first. Shoot, we're too late."?

By. Keith Schaefer




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