Friday, September 16, 2005

The Oil Crisis, Canadian Perspective

Is there an oil crisis in Canada? Some people seem to think so. I got the snippet below via a 'joke' email from a friend:

"Subject: Oil

A lot of folks can't understand how we came to have an oil shortage here in Canada. Well, there's a very simple answer: Nobody bothered to check the oil. We just didn't know we were getting low.

The reason for that is purely geographical. Our OIL is located in Alberta, Newfoundland, Saskatchewan and B.C.

Our DIPSTICKS are located in Ottawa, ONTARIO."

OK, I have to admit this is funny. It's even true, sort of. The reality is that political dipsticks exist in every province, but let's not quibble.

The real question is whether we have an oil crisis in Canada. That depends. Given prices high enough to support extraction costs and sufficient profit, there is enough Canadian oil to last us over two hundred years. If we sell large portions of the oil to the United States, China and elsewhere, it won't last as long. Barring any new discoveries, we would eventually run out of oil, but it would still be long after all of us alive today are dead.

It would be unrealistic to expect Canadian oil producers not to sell oil and its various derivatives into the international marketplace. In order to maintain some reasonable balance between exports and imports, we sell our natural resources, including oil. Consider the information below, taken from the Canada section (2003/2004 estimates) of the CIA World Factbook:

Oil - production: 3.11 million bbl/day
Oil - consumption: 2.2 million bbl/day
Oil - exports: 1.37 million bbl/day
Oil - imports: 987,000 bbl/day
Oil - proved reserves: 178.9 billion bbl including shale oil

We have a lot of oil.

Is oil overpriced? Sure it is. Widely circulated production estimates for Saudi Arabia set their extraction costs at about $4.00USD per barrel. Add in pipeline costs, shipping costs and whatever else and production costs are still very low compared to the current per barrel oil price of $65.00USD or more. I don't know what extraction costs are elsewhere, including Canada, but they will still be considerably less than the current price per barrel. Does any of this matter?

Yes, it does matter. From a business perspective, high prices provide incentive to produce more. This maximizes profits to shareholders, allows more spending on exploration and helps build capital reserves for the inevitable tough times when loony environmentalists and witless politicians create another national energy policy which will effectively cripple the economy and, by interfering with supply via additional taxes, royalties and other disincentives, create even higher prices, but much lower profits to the oil companies.

One of my companies suffers a great deal when gasoline prices go up. I own a courier/messenger company which needs a lot of gasoline to operate. Higher prices create hardships all around. Stable prices at some reasonable level would obviously help. I just don't want the government to interfere and make it worse.

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