Markets Work

Canada has become an even more important  producer of oil as a result of  the recent growth in its production from  vast deposits of oil sands.  Over the past few years, Canada has become the leading supplier of oil imports to the US.  Some project North American energy independence within a decade as a result of continued growth in Canadian production as well as ours, mainly from our oil shale deposits.

But according to the Wall Street Journal, this rosy picture has now become a little less rosy as declining oil prices are causing some companies to re-evaluate their investment plans in unconventional oil.  Declining prices have run into rising development “costs”  for everything from labor to construction material, and contracting” according to the Journal.

Today, the cost of US benchmark crude oil is under $90 a barrel.  Some oil sand developers who mine bitumen and turn it into synthetic crude oil need something around $100 or more to breakeven.  With little prospect for an increase in demand for gasoline or diesel anytime soon, investors in Canadian synthetic crude oil are justifiably cautious.  However, there is a big difference between short run budget adjustments to reflect a temporary situation and a long term commitment to development.

History teaches us that the oil market is cyclical and while today’s circumstances may slow the pace of oil sands development, it is unlikely that there will be a long term retrenchment.  Developers have an incentive to find ways to lower development costs and they will.  The high costs of material and contracting will attract more resources that over time will push cost lower. Increases in productivity and innovation will as well.

Booms always result in demand increasing faster than supply which pushes costs higher as a result of competition for scarce resources.

Those higher costs always attract additional resources which then take resource prices to a more sustainable level.  In the case of engineering shortages, high wages in Canada will attract underemployed engineers from the lower 48.  While many will require additional training, the perceived shortage will be resolved faster than most think.

North America is rich in conventional and unconventional oil resources.  At prices above $60-$70 a barrel, they will be developed. The more oil we produce in North America, the few barrels we will import from unstable regions of the world.  In addition to the benefits of more secure supplies, the investments needed to produce that oil create good paying jobs here and in Canada.

Only a prolonged drop in crude prices, which has happened in the past, would result in a serious retreat from the current development efforts.