Oil Is Our Past It Should NOT Be Our Future
By Private Submission | Sat, 09 Jul 2016 08:00:00 EST
Over the past decade, over $100B has been spent in the Canadian oil sector, and it's estimated that another $218B will be spent over the next 25 years to increase overall production.
And this makes sense to some extent-even when renewable energy sources start displacing oil (and natural gas), the global economy will continue to rely on fossil fuels for quite some time, and maintaining (or even increasing) production capacity ensures that Canada will continue to prosper in the future.
Globally, Canada has the third largest proven oil reserves, and it is the fifth largest producer. (Meanwhile, Canadians only consume a very small fraction of its total production, allowing our industry to export a lot of oil. This, in large part, is why the Canadian dollar is so sensitive to oil prices and why our economy is dependent on oil.)
This illustrates two important things. First, don't allow dependence on single industries or common markets which amount to the same thing. And don't hitch your entire economy to the state of the dollar through highly speculative, top heavy trade agreements. But when it comes to refining crude oil and turning it into value-added products, Canada's abilities are dismal. Currently, Canada has so little refining capacity (2.06 million barrels per day in 2012) that most of our oil is exported, processed in other countries, and then reimported at a higher price.
Since our production capacity seems adequate and we could [in theory] earn more by selling processed oil rather than crude oil, it begs the question, "Why don't we increase our refining capacity rather than our production capacity?" After all, we'd still be creating jobs (just in refining rather than production), we wouldn't pay as much as we do now for refined products, and we'd be able to sell refined products and earn more than we do now.
It's Hard To Look Forward When Ones Future Was Bought And Sold Years Ago
Unfortunately, a lot of it comes down to history and comparative advantage. Despite its low production volume, the US has invested heavily in refining capacity over the years, and was the world's largest refiner at 17.38 million barrels per day (mbpd) in 2013 (China ranked second at 11.54 million mbpd). At over eight times of Canada's refining capacity and so little domestic production, US refining is "cheap" (simple supply and demand). Even if Canada were to begin increasing its refining capacity at any significant scale, it would still be quite costly compared to any increase in US capacity. (Even with increased efficiencies that Canada could gain with modern technology, the simple scale of existing refining capacity in US facilities makes adding to its capacity relatively inexpensive.)
So while it may seem to make sense to increase our refining capacity now, ultimately it's a losing proposition at this point in the game-the time to invest in refining capacity was in the past. And while we can lament buying our own [value-added] resources back at a considerable markup and focus on the past, this would be a mistake (one that we're often too willing to make over and over again). Rather, we should focus on our future and start investing in developing those resources where we can have an advantage. Although we can't say for sure which of our resources those will be, it's better to take a risk on developing those and hope for a win than trying to develop those where the battle is already certainly lost.
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