Wikinvest Wire

Whither the tar sands?

Monday, October 20, 2008

One of the unfortunate consequences of plunging crude oil prices is that it throws the recent strategic planning for energy exploration and the development of alternative energy sources on its head.

Really. Why would Brazil attempt to develop their newly discovered (and very costly) giant offshore oil find if they can't pump the stuff out at a profit? They've got plenty of sugar cane to run their cars and the rest of the world isn't clamoring for any more black goo at the moment.

They're about to cut production at OPEC.

While $150 crude oil may have seemed ridiculous over the summer, prices at under $70 seem equally out-of-step in the fall, especially if you're working on a project that requires a price of $80 or $90 to break even.

Last week, former CIA director James Woolsey quipped:

Every decade or 15 years or so, the Saudis drop the price of oil to where the economic impact wipes out most of the projects in the world that could lead to an alternative for oil. Then, after the projects get canceled, the Saudis let the oil price drift back up.
An intriguing idea to be sure, which is not to say that the Saudis had anything to do with the recent 50 percent haircut for their most important export.

Well, actually, "life-blood" would be a better characterization than "important export".

North of here, our Canadian neighbors are beginning to ask some hard questions now that the new reality of lower oil prices is starting to settle in.

In this report from today's Globe & Mail, they're wondering if digging all that tar out of the ground makes as much sense today as it did back in June.
Other than the potential for a severe economic recession, the development of the oil sands is likely the most important economic and political issue for Canada for the coming decade. Based on present expectations, the oil sands will host at least $170-billion of investments during this period. Canada is already the main oil supplier to the U.S., and proven oil resources in Alberta are second only to Saudi Arabia.

The challenges remain daunting. The costs of mining and upgrading the resource have skyrocketed, and the break-even point for new projects is close to $85 (WTI) a barrel, an increase of $20 from just a year ago. Volatile oil prices, coupled with environmental and regulatory risks, and the massive investments required for long-term returns, have led many existing and potential players to adopt a more “prudent,” that is, conservative, approach. Over the last few months, the stock market correction has been particularly devastating for the oil sand players.
Russia, Venezuela, Iran...

The impact of cheap oil is starting to be felt in ways never dreamed of just a few months ago.

Come to think of it, despite all their protestations a while back, the Saudis really did step up and boost production when the time was right.

Maybe Woolsey was right.

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2 comments:

dearieme said...

Then over the decades a sensible American strategic move would be to divert a large chunk of the Defence budget into developing the Canadian tar sands - for example by guaranteeing the Canadians a market of so many barrels per year at such-and-such dollars per barrel. Similarly, it might be wise to remove the employers' contribution to Social Security (I assume that there is one) and replace it by a tax on gasoline. In fact, the methods of making yourselves less dependent on Saudi Arabia are so obvious that I wonder why you didn't start on them thirty years ago. So much for the great Jewish Conspiracy that governs US politics!

Anonymous said...

Venezuela and Iran are going to see significant production declines because they have been funding massive social programs and not redeploying enough of the oil profits into further exploration.

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