The world's oil marketplace perhaps isn't becoming as fragmented and regionalized as many producers – particularly those in the Canadian oil sands – have begun fearing. In some respects it's a smaller world than it has ever been.
The International Energy Agency's latest monthly oil market report uses the phrase "violent structural change" to describe what's going on in the global market beneath the surface of a fairly flat, lifeless phase for oil prices themselves. Divergent trends have not only formed in both demand and supply patterns, but also appear to be widening.
Asian oil demand is booming, while consumption in Europe and, to a lesser extent, North America is shrinking. Meanwhile, OPEC's exports are stagnating and it is considering output cuts, while North American production surges. U.S. output jumped 13 per cent year over year in November, while Canadian production is expected to rise by more than 10 per cent in the fourth quarter, to record levels.
The supply and demand rifts seem particularly problematic for North American producers – especially higher-cost ones such as those in the oil sands – as the tepid demand and booming output close to home have left prices for their oil far below those nearer the hot Asian markets. While North Sea Brent crude is selling for $110 (U.S.) a barrel and OPEC's crude basket is fetching $105, the U.S. benchmark West Texas intermediate oil is trading around $85; the benchmark for the heavy oil produced from the oil sands, West Canadian Select, is going for a paltry $50.
Yet there's another part of this structural upheaval that offers longer-term optimism for Canadian producers and refiners: The borders and barriers for global trade in refined products are falling away.
"Product specifications are converging. Long-haul product trade is on the rise. End-user markets are globalizing," said the IEA report. "No longer is refining a local industry." Already, it said, North American refineries are seeing rising exports make up for muted demand at home.
This globalization is opening a window of opportunity for Canadian energy companies – if only they had the refining and transportation capacity to capitalize on it. Indeed, limited pipeline and refining capacity is the main reason why prices for oil sands crude are so depressed in the first place.
But that growing world market on the refining side of the business provides a screaming impetus for investment in additional capacity – something that, especially for North American refiners, has proven elusive for years, if not decades. The global marketplace is a siren call for a boom in capital spending on refining and pipelines in this part of the world. And yes, foreign money would be very helpful in accelerating the process and giving Canadian producers access to the markets that need Canadian energy as much as Canada needs those buyers.
This should send a message to Ottawa: As the end markets become more global, your energy investment policy will suffer from being too local.