To drill or not to drill, that is the question

April 23, 2010

By Todd Hirsch
Alberta Business Columnist
Troy Media

Todd Hirsch
Todd Hirsch

CALGARY, AB, Apr. 23, 2010/ Troy Media/ — Who says Alberta’s oil patch is dull? These days, the news stories in the energy world are starting to read much like a Shakespearian melodrama. Recent events in Alberta highlight the theatrical tension playing out on the metaphorical stage, and all of the elements of high drama and suspense are present.

Our play opens amidst the lifting of terrible strife and great darkness in which oil prices had collapsed in the wake of the 2008 global recession. The weeping and gnashing of teeth have subsided, but the province is only slowing emerging from the pain of the downturn. The anticipation of great times ahead hangs heavy in the air.

Enter the hero

Enter the protagonist, the hero for whom everyone is cheering: the Alberta economy. Now, our hero has not always been truly virtuous in the past, but this only highlights the human experience of flaws and mistakes with which the audience always identifies. He’s been forgiven. These days, the hero has fallen on hard financial times and is just coming out of the largest fiscal deficit on record. Falling oil and gas prices (especially the latter) are getting most of the blame.

Then the plot thickens: oil prices rise above $US 80 per barrel. That’s up more than two-and-a-half times from the $US 33 it hit just over a year ago. This is music to the ears of Alberta producers. With costs of everything from labour to materials gradually falling, producers can pump out conventional crude with a tidy profit. Even with the Canadian dollar at par – which chews into the bottom line for producers since oil is priced in US dollars – there is great rejoicing throughout the land.

Next comes the villain, the United States. Her nasty attacks on the “dirtiness” of Alberta’s oil sands have been like stabbing knives – not only from American environmental lobbyists, but also from a dozen or so individual states that have pushed to restrict the importation of bitumen from Alberta’s oil sands. The theatrical tension is intensified by members of Alberta’s own house – Ontario and Quebec – who stabbed Alberta in the back at the Copenhagen talks in December. This is classic Shakespeare. “Et tu, Brute!” Just as Julius Caesar was betrayed by his friend, Alberta felt betrayed by Ontario and Quebec’s finger-pointing in an international arena. This was followed by the director of Avatar and former Canadian James Cameron, dissing the oil sands without really knowing much about it.

But wait! The drama intensifies with the revelation that the US and Alberta are entangled in a sordid love affair. The US is trying to wean itself off its gluttonous consumption of oil, yet she still needs – craves! – Alberta’s oil. A lover turns villain: more classic Shakespeare. It gets the audience every time!

Midway through the action, a rival appears vying for Alberta’s affections: China. While not a new character to the play, she’s made a splash recently with her purchase of a 9 per cent minority stake in oil sands giant Syncrude. With news of Sinopec’s $US 4.6 billion acquisition, the drama heats up. China is looking for stable, secure supplies of oil and through the Sinopec deal she’s making her presence known. Is Alberta tempted to take another lover? Will he have to compromise his desire to upgrade more bitumen at home, rather than export the raw product? The scene is scandalous.

Off to the side from the action playing out between Alberta and China is the US, the betrayed lover. America couldn’t be pleased with China’s flirtatious advances.

Overvalued oil

Finally, a potential tragedy: the Paris-based International Energy Agency announced this week at it believes oil prices are probably 10 per cent or more overvalued. In the mid-$US 80 range, oil is getting too far away from global supply and demand fundamentals. Further price increases could threaten the global economic recovery – which could trigger another 2008-style price collapse.

What happens next? Will China’s presence in the oil sands spur into action the proposed heavy oil pipeline linking northern Alberta with the west coast? Will the betrayed US lover follow through with her demands for clean energy? Or has Copenhagen driven her to madness? Will prices fall? Will they rise?

Stay tuned. This Shakespearian drama isn’t over yet.

Todd Hirsch is Senior Economist with ATB Financial.

Channels: The Calgary Beacon, April 23, the Winnipeg Free Press, April 27, the Guelph Mercury, the Prince Rupert Daily News, the Montreal Gazette, May 3, the Grande Cache Moutaineer, June 1, 2010

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