Letter from... Canada

Alison Arnot reports on the continual rise of oil prices

Crude oil prices have risen steadily over the past couple of years, from approximately US$37 a barrel in early 2004 to more than US$65 this past August, and projections for the next few months see prices continuing to rise past the $65 mark. For Canadians, who live in a cold winter climate, travel great distances between urban centres, and work in high energy-consuming industries like mining, forestry, pulp and paper, and steel manufacturing, this means an expensive winter ahead. Statistics Canada reports that Canada almost equaled the US as the biggest energy consumer of all G8 nations in 2002.

Still, Canada also has a large oil and gas industry. “Rising prices continue to be a gusher in terms of oil and gas profits,” says Derek Burleton, associate Vice President and senior economist with the TD Bank Financial Group. And these profits can mean only good things for the vast oil fields in the western province of Alberta, home to the second largest petroleum deposit in the world. Canada produced 2.6m barrels of crude oil per day in 2004, some 60% of which was exported, mainly to the US.

Any increase in cash flow, for the most part, gets reinvested back into the industry. “This year we anticipated $35bn in capital investment,” says Greg Stringham, Vice President, Markets and Fiscal Policy at the Canadian Association of Petroleum Producers (CAPP). “That money is turning around and going right back into the ground, literally, in drilling and exploration.”

According to CAPP, total Canadian crude oil production is expected to increase to 3.9m barrels per day in 2015, representing a 50% increase over the average production level recorded in 2004. The primary source for Canadian crude is Alberta’s oil sands, the production from which is forecast to triple to almost 2.7m barrels per day by 2015.

These increases will raise Canada’s position globally from the ninth largest producer of crude oil today, to the fifth largest 10 years from now, CAPP reports. “Canada is among those players where production will likely be on the increase,” says Burleton. “It won’t rival Saudi Arabia in terms of power within the sector, but it will continue to make up an increasing share of world output.”

But with the escalating prices, will demand continue at its current levels? “Traditionally, in an oil and gas cycle, when prices rise to exorbitant levels, you do tend to get a negative demand response,” says Burleton. This has been evident in recent declines in sales of sports utility vehicles in Canada and reports indicating Canadians are spending less time on the road and making efforts to conserve energy. However, any worldwide demand reduction is likely to be more muted because developing countries, such as China and India, are less price-sensitive.

CIBC World Markets notes that this reduced price sensitivity requires larger price increases to meet future demand growth. CIBC predicts higher crude oil prices over the next couple of years, to an average US$84 per barrel in 2006 and US$93 per barrel in 2007. By the end of 2007, CIBC economists expect prices to reach or exceed US$100 per barrel.

For its part, the TD Bank has quite different forecasts. “As we move through next year,” says Burleton, “prices will fall back in line with demand… that will knock down profitability [in the oil and gas sector] to more sustainable levels.” The TD Bank’s predictions for 2007 see the price of crude dropping to US$45 per barrel, rising again to above US$50 in 2008.

“This isn’t going to happen overnight, and certainly doesn’t bode well for this winter; however, looking out at the next one or two years, we will see the balance shift back towards consumers, but not to a point that it will detriment the health of the oil and gas industry,” Burleton says. These are words of comfort to Canadians as the long cold winter draws near.

Alison Arnot is a freelance writer and editor based in Ottawa.