Canadian oil and gas production will need to grow to survive and thrive, says Industry experts
By Bruce Lantz
While Canada is reeling from gasoline prices rocketing skyward, and from the inflation that’s coming with it, the finger of blame is pointing in the wrong direction.
The â€˜deep thinkers’ who spend their time sharing what passes for wisdom in their world on social media have dropped their Covid-19 conspiracy theories in favor of claims that the competing companies of the oil and gas industry have somehow banded together to rape and pillage consumers by increasing gasoline prices to previously unheard of levels.
Imagine that. A world still reeling from the physical, mental and financial impacts of the worst virus in decades suddenly is beset with steadily – sometimes twice-weekly – hikes in prices at the gas pumps. These increases in both gas and diesel have, of course, affected much more than the cost of going for a Sunday drive or, worse, a trip to visit the grandchildren. The goods we buy are largely delivered by diesel-guzzling transport trucks whose companies must pass on the fuel hikes of 30%-plus to their customers seeking food, building materials, clothing, etc. Meanwhile, inflation is pushing past 7.9%, and there’s no end in sight.
So naturally the social media experts, and more than a few politicians, are quick to blame the oil and gas industry, which they say is capitalizing of late on the current conflict between Russia and the Ukraine, two major oil-producing nations, for corporate financial gain. There is no doubt that, with restrictions and depleting stocks affecting supply, oil prices have returned to high levels not seen in some years, but one could question why having oil prices per barrel returning to the C$120 range would result in such high prices for gas at the pumps. After all, in 2008 when oil was $147 a barrel, gasoline prices averaged around $1, not the $2-plus seen in many Canadian locations this year. In 2020, the average price of a liter of gasoline in Canada was 75 cents; now it is $1.85. Even more worrisome is the fact that, historically, once gasoline prices rise they never return to pre-rise levels. Consider that in 1991, during the Gulf War, gasoline prices went from approximately 26 cents a litre to 78 cents – and never went back down.
The good news is that, recently, the West Texas Intermediate (WTI) price has dropped to around $118 a barrel after touching $130 while Brent crude is back at $120 after jumping to $139, which should result in lower prices at the pumps. But we need to realize that any one of a number of factors can boost prices – the Organization of Petroleum Exporting Countries (OPEC) placing restrictions on output, wars and, yes, the desire of oil companies to turn as large a profit as possible, thus satisfying their shareholders (at least until those shareholders have to fill their gas tanks).
If it were simply a matter of supply and demand, we could perhaps be forgiven for wondering why supply would be an issue in Canada, which at 167 billion barrels has the third-largest oil reserves in the world (behind Venezuela at 303 billion barrels and Saudi Arabia at 267 billion barrels) and which produces the fourth-largest amount of crude oil in the globe – even shipping almost 4.3 million barrels of crude oil per day to the United States, the world’s largest producer, which in turn has been importing almost 700,000 barrels of crude oil from the rightly-maligned Russia. Canada boasts 18 oil refineries, too, with the capacity to refine 1.99 million barrels a day, yet imports 40% of its needs, about 550 million barrels a day, from the U.S. (77%), Saudi Arabia (13%), Nigeria (4%), Norway and others (3%), including Russia. Canada could ship 200,000-400,000 more barrels of crude daily to the U.S. using existing pipelines and rail. But that would take time as producers would need to drill new wells and oil sands facilities would have to ramp up.
And thus we turn to the area that thus far has largely escaped blame for the current supply/demand/price crisis – the political arena.
Obviously, politicians do not control the private sector oil and gas companies, nor should they. Those companies will ensure that their pricing structure allows for significant dividends for their shareholders. That’s capitalism. Of course, pushing prices upward to unrealistic levels can eventually mean that consumers look elsewhere for their product – or decide they don’t need the product at all – with an ensuing commercial catastrophe.
Enter the politicians who, if they’re doing their jobs properly, have the best interests of their constituents at heart and allow those needs to determine their political platforms and actions. And they have a role to play in the current gasoline fiasco, which is affecting all aspects of their constituents’ lives, from travel to grocery buying, to construction/repair costs, and general merchandise purchasing – all driven upward by the jump in fuel costs affecting transport companies bringing products to customers who in turn have the gas and diesel price increases passed on to them.
Consider this: the largest single cost in the price of gasoline and diesel fuel is taxes, both provincial and federal, totalling 41%. That’s well above the 32% cost of crude oil, the 20% it costs to refine the product, and the measly 7% that is spent on distribution and marketing. So why, we might ask, has Prime Minister Justin Trudeau not stepped up and announced a reduction in federal taxes levied on gas and diesel? Why hasn’t he announced a reduction or cancellation of the hated carbon tax, at least for a while during this crisis? Instead, he takes some pride in announcing that the planned 10% increase in the carbon tax will take effect April 1, increasing to $40 per ton and driving the gasoline prices – and home heating fuel – upwards again.
Some provincial premiers are doing what they can. Alberta Premier Jason Kenney has announced his government will pause the collection of the 13 cents per liter provincial fuel tax, effective April 1 and lasting until the WTI price for crude oil drops below US$90 a barrel. He is also offering taxpayers rebates on their electricity bills of $50 a month and is encouraging Trudeau to reduce the carbon tax instead of increasing it as planned for the near future. And the Nova Scotia government is considering a similar tax reduction, but nothing has been identified by any other Canadian premiers to match these initiatives. Why?
Some skeptics naturally are seeing Trudeau’s love affair with the carbon tax and his unwillingness to take measures to reduce the price of gasoline and diesel fuel as evidence that he wants people to give up modes of transportation that rely on fossil fuels and, instead, shift to electric-powered vehicles. Someone should perhaps tell him that electricity is also on the rise and thus while the climate may benefit, consumers may not. He might also want to realize that EVs are not for everyone. Nor does everyone have mass transit as another alternative to gas-powered vehicles. Consider those living in rural Canada without buses or EVs to travel long distances to work, Mr. Prime Minister
Industry experts are making one thing crystal clear: If the sector is to survive and thrive, production will have to grow. And distribution must improve. That’s a situation familiar to most North Americans.
U.S. Energy Secretary Jennifer Granholm told an energy conference in Houston last week that more supply is needed to offset the impact of the Russia-Ukraine conflict and resulting ban by many nations on Russian oil. Granholm said it’s difficult to balance the need for more oil and gas with the importance of transitioning to renewable energy to fight global warming, but she said increasing short-term supply is key to stabilizing the market. More supply on the market should drive prices down.
But in Canada, the product still needs to get to market. With the nation’s vast reservoir waiting to be tapped, it remains sad that while a world powerhouse like the Alberta oil sands sits within Canadian borders, Eastern Canada continues to rely on foreign oil because no pipeline exists to bring the product east from Alberta. Surely this is a role for Prime Minister Trudeau: forcing the much-delayedÂ Energy East Pipeline through Quebec to be refined in New Brunswick and distributed throughout the Maritimes, pushing harder for the Keystone pipeline expansion into the U.S., enhancing the growth of LNG plants, and more. In fact, there are about 12 natural resources projects with $20 billion awaiting federal approval. Is that good government?
The lesson is simple. Instead of blaming oil and gas companies for doing their job producing and making a profit for their shareholders (especially if you are one), we should expect our politicians to do what they’re paid – by us – to do. They should be aware of the public’s needs, and ensure that they don’t make a difficult situation even worse for their citizens by taking no mitigating action. Then they might deserve their ever-increasing salaries and the gold-plated pensions that await them.