Can There Be a New, Same-Old, Same-Old?

By Jim McNiven

Let’s pretend that Iran makes some kind of deal with the US in the next year or so on its nuclear ambitions and it gets the sanctions regime that is in place relaxed a bit. Also, maybe post-Chavez Venezuela gets its oil export ‘house’ in order. Then what for energy?

Since the 1970s unpleasantness over oil, the game has been pretty much the same. Something happens to cause the spot oil price to peak and the consuming countries all have a slowdown in their economies. This leads to a drop in price and then prices bounce around a narrow range for some years before the next crisis. We got to $140/bbl in the last run-up and then prices fell back to $80-90.

A lot of the oil producing countries have government budgets that are predicated on at least $80/bbl. Hovering around that bottom would put serious stress on those regimes. What they will do is not unlike what Atlantic lobster fishermen do when the price drops for their catch: they try to catch more to make up on volume what revenue’s been lost on price. In spite of OPEC, these countries cheat. That drives down the price even more and a contest develops between those who need the cash and those who are the higher-cost producers to see who will give up first.

Of course, if oil is already near the government budget bottom, then having the Iranians and the Venezuelans, and even the Iraqis bring new production to market would just add pressure to an already messy situation. Complicating this is the decline in US oil imports as the North Dakota fields come on stream. Then there is the Keystone XL pipeline, designed to take Canadian crude south to the Gulf of Mexico and the longer-term Northern Gateway pipeline that will take Canadian crude to the Pacific and its markets, along with the doubling of capacity of the existing pipeline to Vancouver.

Right now, some of this Canadian crude is being sold into the US. What we have to realize is that the oilsands activity is respectable with the price for that crude not being that high. The main oil pricing point is called ‘Brent’ after a field in the North Sea. The Brent price is the world price. Then there is another price at Cushing, Oklahoma, called the West Texas Intermediate, or WTI. (Don’t ask…) The WTI is a lot lower than Brent because the western oil from wherever (Canada, west Texas, North Dakota) can’t get out of that area easily. There may be a glut of WTI while East Coast refiners are buying oil at the Brent price. (Again, don’t ask…) Finally, oilsands crude gets the WTI price, but that includes the pipeline charges, so the world price could be, hypothetically, $110, the WTI price, $95 and the Ft. McMurray price at the pipeline, $75.

If Canadian crude could be exported from the Gulf of Mexico, as well as Kitimat and Vancouver BC, the upside would be really something. No discounted WTI, but a discounted Brent price would be charged for it. That’s what Keystone XL and Northern Gateway are all about.

Now, this scenario does not even take into account what is happening to natural gas and solar, as well as to US regulations on gas mileage. First, when shale gas started to be found and exploited in large quantities in the US, the Obama administration ignored the ‘Pickens Plan’ that promoted the legislated use of natural gas as a replacement for coal and gasoline. I don’t think this will go on much longer. For a long time there used to be a rough 7:1 spread between the price for oil and natural gas, but that is really broken today and is upwards of 20:1 now. The spread may never ‘normalize’, but gas is too cheap for North America not to begin to use it. It may be that the pipeline from the Maritimes to Boston will be reversed and hooked to an export terminal in Saint John or eastern Nova Scotia, but continent-wide, gas will come into its own. Boone Pickens probably won’t get any credit, because he was 5 years too early.

The US mileage targets probably can’t be met through more standard engine technology. The hybrid gasoline/electric car may be the only reliable alternative, unless it is the all-electric. Car companies have an interest in the gasoline engine because so much has been invested in it over the past century, but if they can sell electric ones, so be it. A car’s a car.

The real pioneer here is billionaire Elon Musk, producing Tesla electric vehicles in California. Recently, a reporter drove a Tesla 400 miles from Lake Tahoe to LA, stopping at 4 charging stations (read electric ‘gas’ stations) to get relatively quick recharges. But, as the saying goes, ‘the pioneer is the guy with arrows in his back’. If not Musk, someone will get the electric personal transportation system right.

Then there is solar. My understanding is that the price of electricity produced by solar panels has come way down. My wife’s niece and her husband just got their first power rebate cheque for producing, through solar panels, more power at their home, near Boston, than they consumed, including charging their Prius car.

It’s hard to conceive of $200/bbl oil happening, with what’s coming in terms of supply and where alternatives are either very cheap or getting very competitive. It is even hard to see how $100/bbl oil can be maintained.

James D. McNiven is Professor Emeritus at Dalhousie University and Senior Policy Research Advisor with Canmac Economics Ltd. He was the Fulbright Research Professor at Michigan State University’s Canadian Studies Center in 2010-11. 

Until his retirement from Dalhousie, he held the R. A. Jodrey Chair in Commerce in the School of Business Administration and was a Professor of Public Administration. From 1988 to 1994, he was the Dean of the Faculty of Management at Dalhousie.  Prior to that, he was the Deputy Minister of Development for the Province of Nova Scotia (1981-88) and the President of the Atlantic Provinces Economic Council (1977-81).

He has been the CEO of a small technology company and has been a member of a number of corporate and government boards, including the Blue Cross of Atlantic Canada and the federal government's International Trade Advisory Committee. He was a member of the federal government's Royal Commission on National Passenger Transportation. 

Dr. McNiven has a PhD from the University of Michigan.  He has written widely on public policy and economic development issues and is the co-author of three books. His most recent research work has been about the relationship of demographic changes to Canadian regional economic development. He also has an interest in American business history and still continues to teach at Dalhousie on a part-time basis.

His email address is j.mcniven (at) dal.ca.