"Tidewater." For the oil industry, that's Nirvana. Get Canadian oil to tidewater, the barons say, and our economic future will be rosy. But that argument no longer holds water -- or oil. Eugene Kung writes:
A number of years ago this argument may have been true, especially when you ignore the economic, environmental and social costs not captured by market prices (which economists call "externalities").
But we live in a different world today. Oil prices have plummeted and are forecasted to stay low for some time. The U.S. is now a major producer of oil that is cheaper than that from the oil sands, and it recently lifted its 40-year ban on exporting oil. In addition, solar and wind power are now "crushing" fossil fuels, with investment nearly double that of oil and coal combined in 2015. And finally, the world came together in Paris and agreed to aim to hold global temperature increase to 1.5 C, which necessarily requires a decarbonization of the global economy.
All of these factors mean that the economic case for getting oil to tidewater by pipeline in Canada has evaporated.
Even some of the oil barons are beginning to sing a different tune:
Last month, a brief from Oil Change International debunked the economic myth of tidewater access and concluded that producers of Canadian oil are already getting the best possible price through existing pipelines to the U.S., which access the largest heavy oil market in the world.
The brief discusses why Western Canadian Select (WCS) -- the key Canadian benchmark for heavy oil -- trades at a discount to other benchmarks such as West Texas Intermediate (WTI), the primary benchmark for U.S. Gulf Coast and Midwest oil. The two key factors are quality and geography: WCS trades for less than WTI because it is lower quality crude that is more expensive to refine, and it must travel longer distances to refineries.
Economics has caught up with the oil sands. And Alberta is in for a rough ride. But the sooner everyone gets used to the idea that there will be no new pipelines, we can move forward.