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Ironically, As Price Per Barrel Drops, American Oil Supply From Canada Imperiled

November 3rd 2008

Energy / Environment - Oil Sands

This continuing coverage on the supply arises from the just released book, The Plan: How to Save America When the Oil Stops—or the Day Before (Dialog Press). Buy it here.

Americans may be rejoicing about lower oil prices, but the law of unintended consequences and the vagaries of the global oil supply have begun to kick in.

Ironically, oil may become dramatically scarcer for Americans--not as a result of manipulations by the OPEC oil cartel, but due the fragile economics of Canadian oil.

America consumes some 20 million barrels of oil per day, about 70 percent of which is imported. But the number one supplier to the United States is close to home, our northern neighbor, Canada. The nation to the north sends some 2 million barrels of oil per day to the United States from Alberta in western Canada. This petroleum comes from a source commonly known as “oil sands.”

Oil sands are deposits of oily goop embedded in sand, and comprise about 95 percent of Canada’s massive petroleum reserve of approximately 180 billion barrels. That reserve was not globally recognized until 2003—near the time of the American invasion of Iraq. Prior to that, the environmentally threatening, water intensive, heavy industrial nature of oil sands extraction was considered too expensive to be considered economically viable. With oil prices telescoping toward $150 per barrel, the hyper-expensive oil sands process became viable, profitable, and the basis for a sudden American reliance on North American petroleum as a source of fuel. 

However, many observers feel that petroleum from Canadian oil sands is not economically feasible when the price of a barrel sinks below $80. In recent days, the price of oil has crashed to below $65 per barrel. At press time, some spot oil markets were down to $60 per barrel. That cost ineffectiveness has collided with a colossal global credit collapse to create a perfect storm that is pausing and slowing the needed Canadian oil supply expansion to the United States. 

Suncor Energy, a leading player in the oil sands, has already put the brakes on major plant upgraders and other expansion needed to satisfy the growing global market. For example, Suncor’s $16.2 billion Voyageur upgrader project, due to be completed by 2013, has now been postponed. Petro-Canada is likewise deferring some $10 billion worth of improvements scheduled for its Fort Hills enterprise. Multi-billion dollar cost overruns on Canadian oil projects have now become intolerable. In one case, a recent review of a Fort Hills oil project revealed a 50 percent cost overrun in a single year, costing almost $20 billion. . Petro-Canada CEO Ron Brenneman admitted, “We haven’t thought our way through what the economics might look like” with regard to continuing future expansion. 

Among the Canadian headlines that rocked global oil circles was one in the Globe and Mail reading “Oil Sands Projects Slashed as Credit Crisis Hits Alberta” and one in Reuters, “Canada Oil Sands Slowdown May Halt Runaway Costs.” FirstEnergy Capital analyst, William Lacey, admitted, “The big guys have all suddenly drawn a line in the sand that wasn’t there before.”

Canadian oil supply is further complicated by a little-known reality. While Canada is a net oil exporter, pumping millions of barrels per week into the United States, it is also an importer in its eastern provinces of some 850,000 barrels per day from such countries as Iraq, Saudi Arabia, Algeria, Egypt and Venezuela as well as the United Kingdom, Norway and other countries, Canadians have begun to ask why the nation sends the vast majority of its western oil product into the United States while Eastern Canada must import from overseas.

If Canadian oil flows are reduced by virtue of dollar dynamics, it may dramatically decrease the American availability and force ever more reliance on a Persian Gulf supply that is now ramping down. Indeed, in response to the dip in global demand, the cratering world economic structure and the rise in the American dollar, OPEC nations have decreased production by some 1.5 million barrels per day and are now discussing further cuts. At the same time, America’s number two source of oil, Mexico, is beginning to cap its wells and wind down its oil export business, which is likely to run dry within a decade. All these intertwined dynamics of global oil supply only serve to emphasize the volatility, unpredictability and tenuousness of the fuel that currently propels some 98 percent of all transportation in the United States of America.

Edwin Black is the New York Times bestselling investigative author of IBM and the Holocaust, Internal Combustion and his just released book, The Plan: How to Save America When the Oil Stops—or the Day Before (Dialog Press). More information about The Plan can be found at www.planforoilcrisis.com.

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