Tuesday, February 10, 2009

Oil Sand Trade between Canada and the U.S.

As oil prices climb, tar stand oil extraction in Canada is increasing. Tar sand oil, or bitumen, has a higher price premium than drilled oil - because its harder to produce and is higher quality - and is the dirtiest solution to U.S. "energy independence".


Even though "methods of separating oil from sand leave behind huge waste ponds of thick, caustic sludge", this is already a major oil production method. Since the 1980s, patents touting new extraction methods as "environmentally friendly" - by using chemical solvents and naphtha as opposed to boiling water under the tar- cannot live up to the expectations. All methods have a negative net-energy use. U.S. and Chinese demand for the tar oils, and the business's rapid expansion in Alberta, is the main reason why Canada has "no chance" according to Canadian environmental ministers at meeting its Kyoto commitments.

OPEC: a divided power

OPEC has always been divided over price. Its members differ strongly on the urgency with which to increase its prices because two different kinds of nationalized oil-producers operate in the cartel. One group of members - Saudi Arabia, Kuwait, and the UAE for example - have small populations, high GNP per capita, and ruling elites who benefit from slow modernization. For them, the best way to use their large oil reserves is to extend oil revenue for a long period of time into the future. This means a higher price today, and oil production that is slower than demand.

On the other hand, OPEC members like Indonesia, Nigeria, and Algeria have large populations, smaller GNP per capita, and smaller oil reserves. Their best strategy would be to decrease the price of oil in order to maximize oil revenue in relation to other OPEC member states. This would last a shorter period of time, and since the stronger members reject this idea, it would be "cheating" against the OPEC cartel. The U.S. has supported member-states who cheated on the cartel before, evidence by the First Gulf War when Saddam Hussein sought to punish Kuwait for lowering prices on OPEC. Then the U.S. stood by its defecting ally.

However, the U.S. does not necessarily want low prices coming from OPEC nation-states anymore. Because the largest oil reserves are located in mainly three Middle Eastern countries - Iran, Iraq and Saudi Arabia - it is reasonable to assume that the U.S. wants to see lower oil prices coming from places it has good political relations with, such as Canada.

Andrew Nikiforuk, author of Tar Sands: Dirty Oil and the Future of a Continent, says oil companies want to see Canada as "the next Saudi Arabia".




What OPEC wants is not what the U.S. wants

High oil prices negatively affect the 'consumer surplus' in the United States: being so dependent on petroleum imports, the higher the price of petrol, the less product the U.S. economy as a whole is able to produce and consume. A decrease in world oil supply, easily enough, raises the price of oil and sends all prices in the U.S. economy higher.

Walter Adams and James Brock, two economists who take a structure-conduct-performance approach to industrial organization, believe the U.S. policymaker's preferred outcome is that the U.S. receives a lower price of oil, but consumes less of it - at least from OPEC producers.

However, OPEC wants a position that - according to Adams and Brock - the market would not allow. OPEC wants a higher price for oil and even more consumption of it. Over time, producers of oil substitutes would earn more revenue from consumers in the U.S. and elsewhere because consumer demand is not as inelastic as OPEC wishes.

The reason why the U.S.'s preferred quantity of oil demanded is so low according to Adams and Brock, is because of the need for national security. Dependence on Middle Eastern oil, a politically unstable and unfriendly region, is too challenging to continue. Diversification of energy resources will provide the best substitute for Middle Eastern oil, they say.

Canada

Though Adams and Brock like the idea of diversifying into new forms of energy consumption: solar, wind, "green energy", it is more likely the the U.S. will diversify by expanding its resource base into Canada through trade and security agreements.

Canada and the U.S. have the largest and most comprehensive trade relationship in the world. Both are G8 members, founding OECD members, NATO members, joint members in the North American Aerospace Defense Command (NORAD), members of the new Security and Prosperity Partnership, and have dozens of agreements like the Business for Economic Security, Tourism and Trade (BESTT) and the Western Hemisphere Travel Initiative (WHTI). The tendency, then, for the U.S. to view Canada's oil-rich resources as close to a domestic resource as possible, is inviting. Importing dirtier oil from a friendlier source is a more viable option than dependence on Middle Eastern oil, in the eyes of the U.S.

That means Canadian bitumen will be the future of oil consumption and production in North America, regardless of the environmental impacts.

4 comments:

Toronto realtor said...

The US have always had a great appetite for energy. It is no surprise that the States are looking for a different main supplier for the rock oil - and since Canada has always been a good friend, it's no wonder that the oil sands are their no.1 choice. Environmental issues are usually only 2nd, 3dr or "x" priority, so no surprise here.
Elli

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