A sharp correction in oil prices is putting the debate around major pipeline projects, such as Keystone XL, into a more nuanced light.

Part of the impetus behind constructing new pipelines to carry bitumen from northern Alberta to the U.S. Gulf Coast, Kitimat on the Pacific, or even all the way across the country to Saint John, New Brunswick was to help close the substantial discount between Canadian oil and world prices. Well, crude’s recent drop into the $85-a-barrel range has basically collapsed the once wide-open spread that had existed between West Texas Intermediate and Brent crude with hardly any new lengths of pipe being laid into the ground at all.

It’s quite a turnaround considering that not that long ago WTI had traded as much as $40 a barrel lower than Brent. The difference between Brent and a barrel of Western Canadian Select, the benchmark price for oil sands product, was even more significant, a fact that had caused considerable hand wringing in downtown Calgary as well as on Parliament Hill.

Oil sands players, as well as U.S. producers in North Dakota, have been clamouring for pipeline approvals, claiming that all of the political foot dragging around pipeline projects weakened pricing power and critically hampered their operations. While those producers are still waiting for new pipelines to be built, the price of a barrel of WTI and Brent crude are now trading within a few dollars of each other (in part due to the rapid emergence of oil-by-rail).

It’s a development, however, that won’t be causing any champagne corks to be popped in the boardrooms of Suncor or Canadian Natural Resources. Canada’s oilpatch suddenly has bigger fish to fry than figuring out how to get its oil to tidewater. The worry now is what’s happening to the global oil prices, which they’ve been coveting.

The world looks much different from the days since multi-billion dollar pipeline projects such as Northern Gateway and Keystone XL were first proposed. Both Brent and WTI are trading below $100 a barrel and it won’t be long before they fall below $80. If you doubt that outlook just note what Saudi Aramco did earlier this month. Instead of cutting back production by several million barrels a day to support prices like they did in 2008 and 2009, the Saudis instead chose to protect their market share by slashing prices.

For those wondering about the future direction of oil prices, the behaviour of the world’s most important oil supplier and lead member of OPEC is instructive. Saudi Aramco has now cut all of its export prices, reducing prices to Asian markets to their lowest levels since the 2008 recession.

It’s not hard to figure out where this is going for oil sands producers. When commodity prices fall, whether it’s coal, iron ore, copper or otherwise, the effect on supply is the same. Falling prices hit high cost producers first and hardest. Guess what’s happening in the oil sands right now?

In the last several months alone we’ve seen two major announcements of shelved or cancelled projects. Total SA is walking away from its Pierre River project, while Norway’s Statoil is doing the same from the Joslyn mine. In light of the current outlook for oil prices, such decisions aren’t a surprise.

Even production from prolific shale plays like the Bakken, which straddles North Dakota and southeast Saskatchewan, are at risk. At price levels below $80 a barrel, you can expect to see the current frantic pace of drilling in the region start to gear down.

For pipeline companies with major proposals on the table, such as TransCanada and Enbridge, falling oil prices are a game changer of the same magnitude that rising prices were a decade ago. Back then, soaring prices created an urgent need to build new pipelines to connect North America’s burgeoning supply to coastal refineries and world markets.

We’re now in a different world. At the root of today’s problem is global demand that is no longer growing quickly enough to support the prices necessary to keep expanding expensive unconventional sources of supply like the oil sands. Lower prices will effectively strand those reserves regardless of the transportation options that may become available. Even if President Obama approved Keystone XL or the National Energy Board gave the green light to Energy East, falling commodity prices mean that soon there might not be enough oil flowing out of northern Alberta to fill those new pipelines.

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  • scissorpaws

    Arguably more concerning is the fact that these dropping oil prices indicate a slowing global economy, and that we are potentially already in a deflationary spiral and admit no wit or wisdom to get out. Stock/commodity prices are dropping steadily, while bond returns in the US and even such “spendthrift” nations as France remain historically low. As diesel and gasoline prices follow crude’s down, food prices will drop. Wages are already largely stagnant, so prices of goods will drop as well. People get accustomed to next year’s price being even lower than this year’s, the situation will only worsen. In a stagnant economy people with all the money, the .01 percent, have no reason to invest. I guess you call this a Depression. The only solution is for governments everywhere to spend big time on infrastructure and act “irresponsible” thus driving down the value of their currency, raising inflation, and inspiring the filthy, stinking rich to invest it or lose it.

  • Carol987

    It sure would be nice if there were some really accessible sources of information where facts about energy were regularly posted and updated. For example, I’d like to know how much energy, and what types of energy, are produced and consumed by various countries, for specific industries and consumers, how this is changing over time, and what inputs go into these energy sources and how those costs are changing. For example I keep hearing that China is leading in solar but to what extent, and how exactly are they managing to do this – e.g. is all of this government-owned, do they have any private companies, what costs are involved, etc.

    I’ve been all around the IEA website and it is a disaster, as far as making information easy to find and read. There are lots of flowcharts and pie chart breakdowns by various indicators but they are obviously constructed by, and for, data mining professionals. For the average person these charts are illegible. There are also lots of documents on specific topics (available for a price which seems to start at around $100 each) but even reading the summaries for these documents is not very helpful.

    Anyone know of any good websites devoted to this? Jeff’s blog discussions and his books are really good but obviously he can’t be expected to provide this type of current detailed information on a regular basis or he’d have no time for anything else.

  • JB

    Have we reached Peak Oil de facto?

  • rigpigpetey

    sounds like that day trading isn’t working out,……

  • Doug

    It wasn’t that long ago the talk here (and elsewhere also) was that oil prices would keep going up, up, and up forever and ever because we passed peak oil. Now that it’s dropped to the $80 range, the talk is that it’s going to keep going down, down, down. I heard all of this before in 1998, and we all know what happened after that year. Today I was driving my GASOLINE powered car around a city with a lot of other GASOLINE powered cars, I saw some trucks and buses driving around with DIESEL engines, and got stopped at a level crossing while a train, pulled by 2 DIESEL locomotives went by. I also saw many planes flying over, fueled by JET FUEL or AVGAS. Thanks for reminding me, my GASOLINE fueled car will need an OIL change soon. Yup, I’m getting ulcers and having trouble sleeping worrying about the future of oil. Relax, it’s probably a temporary drop. Better yet scoop up some energy company shares while they’re still on sale.

  • political ranger

    The Oil Drum used to be the go to place for that kind of data Carol. But they shut down a year ago. If you go to their website they have left links to the authors and editors. Also about 10 years of reading for you in the archive.
    One final thing; none of this data is ‘easy’ or particularly ‘accessible’ in the sense that you just read it and now you have it. You are going to have to be prepared to take notes, cross check and use some logic and likely arithmetic. A lot of work but then you’ll have information that is real and factual, a rare commodity in the petro world.

  • Carol987

    thanks ranger – I reviewed several of the archive articles at TOD, definitely very interesting and well written but actual data is not consistently presented in a way that makes sense to the average person. TOD also has a lot of the IEA Sankey diagrams which aren’t exactly what I’m looking for either. I don’t have a problem with reading and researching but when granular data is rolled up into categories that don’t match the criteria I want to know about, it’s impossible to use – you can’t unroll data roll ups. Example: sometimes they talk about Canada as a separate entity and in the Sankeys they group data by “The Americas” whatever that is. It’s maybe one reason why people are so easily misled into climate change denial when there don’t seem to be any definitive and reliable sources of data that are open to the public where information is presented in various different ways that most ordinary people are interested in.