By Ken White

GLOBE-Net, September 19, 2012 - A few years ago the "Peak Oil" proponents strongly argued that in the near future oil shortages, insecurity of supply and price volatility would destabilize economic, political and social activity. 

Peak Oil, the point where the highest practicable rate of global oil production has been achieved and from which future levels of production will either plateau, or begin to diminish, would mean the end to the era of cheap oil.   

It was argued the impacts of "Peak Oil" would include major increases in the cost of travel, food, heating and retail goods.   

With the prospect of conventional oil supplies diminishing attention turned to the vast quantities of unconventional hydrocarbons including the Athabasca oil sands and vast quantities of shale oil in the United States and Australia, even though at that time the cost of commercially mining these unconventional hydrocarbons was considered very high - well over $100 a barrel.  

The global oil industry began to invest heavily in Canada's Athabasca oil sands and this trend is likely to continue over the next decade.

Peak oil thinking (as well as the potential for export profits) is part of the rationale for construction of the Keystone pipeline, which would carry raw bitumen slurry to Southern U.S. refineries, and the Gateway pipeline to Kitimat British Columbia, to export raw bitumen to China and other Asian markets.

Is this the End of Peak Oil? 

Recent oil production forecasts by leading energy consultancies are starting to "debunk" the Peak oil scenario, at least for the United States. Oil production in the U.S. could rise to nearly five million barrels a day, or 74 per cent, in the next decade. An oil drilling frenzy particularly for shale oil in the Dakotas is taking place. 

"A torrent of oil pumped from new wells across the U.S. is setting in motion a decade of dramatic change that promises to wean the country off OPEC, and threatens the growth of energy imports from Canada," said the Globe and Mail in September 10, 2012, adding that an oil drilling frenzy is taking place in the United States. The newspaper reported "three years ago, 288 U.S. rigs were drilling for oil. Currently, 1,409 rigs are "chasing oil, a nearly fivefold increase". 

The increased U.S. production capacity brings mixed results for Canada. While Canada will continue to supply the U.S. market, its crude exports could face a wall in as early as 2018 as a result of pipeline constraints, reduced fossil demand, greater energy efficiency and growing U.S. capacity.  The U.S. crude oil market could conceivably remain flat from 2018 to 2025. 

Recent projections by the United States Energy Information Administration, Annual Energy Outlook 2012 also confirm this hypothesis.

^{Figure 1: United States Production and Imports of Crude Oil and Projections to 2025 -  Source: US Energy Information Administration, Annual Energy Outlook 2012}

The red line in Figure 1 refers to US crude imports, which is forecast to decline from 2015 to 2025. The blue line refers to the growing US domestic production, which the US Department of Energy forecasts to experience constant growth to 2020. Note, the linear trend line for US crude oil imports is a constant decline and the trend line for US production is growing. 

While the reduced U.S. demand for crude oil exports may affect the Middle East and Venezuela more than Canada, this situation is nonetheless a "wake-up" call that strongly reinforces the need to exploit new markets especially in China and other Asian economies. 

In 2011, 99 percent of Canada's crude oil exports went to the United States and only 1 percent was destined to China albeit the Chinese market has been growing rapidly as shown Figure 2. The crude oil to China is presently being distributed by pipeline to Vancouver and then shipped by tanker.

^{Figure 2: Canada Crude Petroleum Exports to China and Trend - Source: Industry Canada, Trade Data Online}

Canada is stickhandling two contentious pipeline applications to carry Canadian bitumen slurry to both Texas in the United States and from the West Coast for export to China and other Asian markets. The growing oil supply being generated in the United States could be a wakeup call for Canada to more seriously see the importance of creating additional channels to the world, especially in Asia. 

The new paradigm in the United States involving increased supply and lower crude oil imports should cause the Canadian oil industry, even more than it is today, to realize the importance of creating additional channels to the world.

Capturing these new markets are the key drivers behind the future development of the requisite infrastructure including port development and pipeline construction in order to distribute and transport Canadian crude oil to markets in Asia (mostly China).

Selling massive amounts of crude bitumen to Asia involves potentially strong economic rents and substantial profits to the Canadian energy sector. The strong economic rents of the Canadian energy sector are contributing to Canada's strong economic position in the World and positive growth, which helps the economy in not only Western Canada but also in Central Canada which contributes critical indirect goods and services to the "oil patch".

Our strong Canadian dollar is reflective of a strong economy and the confidence that the international investment community places in our country. 

However, these strong profits and economic impact are also associated with an opportunity costs as the crude bitumen shipped to Asia would also be processed there and not in Canada. This loss of Canadian processing jobs would involve a considerable opportunity cost or benefits foregone.

Additionally, the increased pipeline and tanker traffic involves substantial environmental risks and the trade-off regarding these risks and benefits (corporate profits) is subject to considerable debate, especially in British Columbia. We live in interesting times and the Canadian crude oil sector is moving into "unchartered waters". 

What about "Peak Oil"? Has it been debunked? Not completely. The world is currently awash with oil, however, the new sources of supply largely come from shale oil and from oil sands. And vast quantities of shale gas are providing more cheap (and cleaner) energy. 

As discussed above, the growing increase in supply in the United States involving both shale oil and shale gas strongly reinforces the need for the Canadian energy sector to grow new markets particularly in Asia.

However, capturing these new markets must reflect a "balanced scorecard" where profits, jobs and environmental concerns are all adequately addressed. That is easier said than done.