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, Okla., 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 oil patch, 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-Mégantic 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-Mégantic 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.
Jeff Rubin is the former chief economist of CIBC World Markets and an award-winning author. His latest book is the End of Growth .