The bitumen bubble — that much discussed and oft-lamented hindrance to Canada’s public finances — seems to have finally popped. North American oil prices, at least for the time being, are once again fetching around the same amount as world prices, after trading for nearly $25-a-barrel less earlier this year.

A return to strength for Canadian oil prices is certainly music to the ears of Alberta’s oil sands players, as well as those in the Bakken region of southeast Saskatchewan. But not everyone is hearing the same sweet sounds. The disappearance of the huge price disadvantage that has so burdened North American oil producers should ring a discordant note for environmentalists.

By some measures, the environmental movement’s opposition to the Keystone XL pipeline project has produced a win for a green agenda. Environmentalists, at minimum, have delayed Keystone from being built. Ultimately, they may still manage to scuttle the project entirely. As the oil industry knows all too well, a lack of adequate pipeline infrastructure means oil from Alberta and the Bakken has piled up in the storage tanks in Cushing, Oklahoma, where West Texas Intermediate crude is priced. The more oil sloshing around in the Midwest the larger WTI’s price discount to Brent crude.

A hopeful environmental movement might envision any number of victories that could stem from stymieing the North American oil industry’s access to full world prices. Do it for long enough, for instance, and the economics of the oil business turn into a less appealing destination for future investment dollars. Extracting bitumen from the oil sands or fracking shale rock for tight oil is already expensive, let alone with the promise of a steep price discount for one’s troubles. In the long game, stopping major new projects such as Keystone could mean production gains are eventually capped by pipelines that are already at full capacity. Instead of North America realizing a spectacular increase to supply, as is being forecast, pipelines would become a bottleneck that would force more oil to stay in the ground for longer.

What environmentalists didn’t count on was industry’s response. Railways, long off the radar of Canada’s oilpatch, rushed in to fill the gaping need for transportation. Rail cars are no stranger to the task of shipping oil. In other parts of the world they still shoulder a heavy load, but in North America they seem like more of a relic of the industry’s early days. Not any more. In the space of less than two years the amount of oil being shipped by rail in Canada nearly tripled to almost 300,000 barrels a day. Without new pipeline capacity, the amount would surely go even higher.

There’s probably not much that Prime Minister Harper and I would agree on when it comes to energy policy or the future of carbon emissions. That said, it’s hard to argue with him when he says shipping oil by rail is far more environmentally challenging than moving it through a pipeline.

The disaster at Lac Megantic casts the rail-versus-pipeline debate in entirely new terms. The daily headlines tell us there’s no shortage of blame to be handed out, whether it’s a negligent engineer or cost-cutting railway executives. In the bigger picture, though, when millions of barrels of oil start getting hauled across the continent practically overnight, it seems a near certainty that a tragedy on the scale of Lac Megantic will occur. That’s not a statement about corporate malfeasance, but merely the laws of probability at work.

The environmental movement definitely didn’t want oil to be diverted from pipelines to rail, of this I’m sure. But the Keystone saga is riddled with unintended consequences. In one moment an environmental victory in Nebraska is protecting a critical underground aquifer from an incursion by a massive pipeline project. In the next instant, as I explain in my latest book, that apparent success is unloading that same risk on British Columbia’s pristine Great Bear Rainforest. In the meantime, thousands of new rail cars are shipping oil around the continent while regulators try to play catch up on safety standards.

The grim news is that we’ve gone from bad to worse when it comes to how we move oil around North America. With oil prices now back in triple-digit territory, there is, at least, a glimmer of hope. Oil is becoming too expensive for our economy to afford. The same high prices that are spurring producers to load crude on to train cars are about to, once again, curb our appetite for the fuel.

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  • Outside_of_the_Box

    Mr. Rubin:
    You have argued that world-changing oil prices were just around the corner for how long now – 6,10, more years?
    It seemed like a convincing case, kudos to you for that, but it would appear oil has resisted that scenario playing out thus far.
    What factors have contributed to that, and why should it be any different now?
    What do you see playing out for the next 5-7 year window as we approach 2020?

  • Steve

    Oil prices going up and railroads flush with cash. Sounds like a win-win.

  • Steve

    Oil prices going up and railroads flush with cash. Sounds like a win-win.

  • Instincts

    People like you just don’t get it. With the world economy teetering on the brink of total breakdown as it has for several years, there is simply a price ceiling at and beyond which, people’s ability/willingness to pay, prevents oil prices from hiking further. Don’t anyone kid themselves that if the oil industry could get higher prices than what caused the 2008 crash, they would. As we speak, the oil industry is ‘testing the waters’ again in the Western world, to see what appetite there is to push the limit higher. But it aint people’s collective appetitie or willingness that determines this, but rather their ability to do so within their collective living standards. It is as simple as that.

  • JB

    Jeff, I would suggest that you tackle in a coming post / book the key issue of net energy production as opposed to the gross extracted volumes.
    As we all know, extracted volumes of fossil fuels may still be going up but the EROEI of the remaining reserves is on average going down. Hence, where we are standing in terms of the net energy made available to the economy is a critical factor to determine if growth is still possible and, if not, to know how fast we are sliding down the net energy cliff…
    Furthermore, not all countries have the same energy mix and as a result some may be sliding much faster than others.
    JB

  • Outside_of_the_Box

    Actually, prices go higher than your average person would prefer all the time.
    And they may not have a choice in the matter if various factors hike it up past where they can afford.
    Don’t assume the oil industry wants prices so high.
    Or that they can control prices either.
    It’s NOT “as simple as that”
    But what do “people like me” know anyway :)

  • Michael Cole

    Well first of all, its not a conscious decision on the part of anyone what the price of a barrel will be. The market sets the price and to my memory, the rule of thumb is that over the long term the price of oil is typically about 5% higher than the most expensive oil currently being consumed.

    Now the problem is, as demand goes up, we need to pull oil from more difficult locations, the Arctic, Tar Sands, Oil Shale, deep under the Gulf of Mexico, etc. So lets suppose that to meet world demand we need to extract oil from all of the above (except the Arctic, for now) and the most expensive is, for arguments sake is say, oil sands, which we will say cost $90/barrel, so over the long term the WTI benchmark should be just shy of $95/barrel.

    Now lets suppose there is an owner of a trucking company and she reckons that for every $1 increase in the price of oil (well it would be in diesel prices but there is an obvious correlation) she needs to jack up her freight chargers by say $0.05/ton, meanwhile the airline executive comes to a very similar conclusion regarding Jet-A (Jet grade kerosene), the Taxi cab owner sweats over the price of 87 octane gasoline, & cetra. In short the price of everything goes up, then what happens? Well we still need to eat, but transport of food has made the cost of food go up, we still need to drive to work, but now the drive is more expensive, so we cut back, can’t afford to fly = airline goes under. Can’t afford to go on vacation, have a ‘staycation’, tourism industry shrivels. Keep this trend up and ultimately, recession. Then as people loose their job they stop driving (no place to go) they stop traveling, they run their A/C less and heat less (save what money you can) and very quickly you can see a huge plunge in demand for oil.

    There’s a joke, economists have correctly predicted 14 of the last 5 major recessions. And I believe it was Jeff Rubin who pointed out that prior to every recession since the Second World War there’s been something like a 15% rise in the price of oil in less than 1FQ (or something along those lines). Our economy depends on cheap oil and the price of oil depends on a healthy economy, remove the cheap oil, see unemployment surge, dump cheap oil on the market, see employment pick up. More directly to your point, see the price of oil go up and watch as the job looses mount and then suddenly, the price of oil declines. Its what a chemist calls a dynamic equilibrium, except the amount of oil is finite and decreasing at about 100 mbpd, making ever more expensive oil the new normal.

    So unless you know of a huge oil well on the moon, or mars, you may want to tune up your bicycle.

  • Outside_of_the_Box

    But this is what Rubin has been saying for close to 10 yrs (less/more?) and things have not moved in that direction.
    So what are the factors that have prevented his predictions from coming to pass?
    Recent discoveries/projects in Canada/US etc?
    Cheap natural gas?
    Market mechanisms?
    Subsidies?
    I’d like to get a better picture of these factors.

    And if these factors aren’t going to be in place forever, what will change the picture, why, and when?
    I would actually like to see Rubin’s picture of a slow down come to pass.
    And it seemed like a convincing argument to a laymen like myself.
    But then you read all kinds of reasons why Rubin (and the like) have been and will continue to be proven wrong.

  • Outside_of_the_Box

    Sounds like you have some ideas on it.
    Care to elaborate?

  • Outside_of_the_Box

    From what I have gleamed, the OECD is suggesting price of oil could reach as high as $270 by 2020. While some Russian experts are suggesting somewhere around $200. And the US Energy Ministry is saying not higher than the current high of $150. What are we to make of these predictions? And based on what we’ve seen to date, there would be havoc long before we reached the $170 mark for example, would there not?

  • awb

    awb to Jeff.

    I’ve been an avid follower of your “take no prisoners” approach to these issues. This most recent edit seems to back off a bit, when in fact the evidence continues to pile up convincingly. I mean, Hell, you’ve now got America’s pet investor, Warren Buffett, about to try to explain his judgement on BNSF, and many more.

    I would like to meet you when our schedules permit, and trade notes. Best to see my resume at imdb.com. I am familiar with yours. awbeattie@earthlink.net.

    Best
    Alan Beatttie

  • Matt

    Great piece, Jeff. I just finished reading “The End of Growth” and thoroughly agree with your conclusions. Lets hope the high price of oil will lead to changes sooner rather than later.