Want to Know why Canada imports oil at higher price than it exports?

[MaximeValmont]

I hear about it all the time in Coffee shops, street, restaurants etc etc. Everybody seems to NOT understand why Canada Imports so much of it's Oil. It's well known that we export at a lower price than we import. Even the Bank of Canada talked about it :

http://www.canada.com/business/fp/Canada+caught+price+pinch+warns/6478718/story.html



Now, Why not change it? It hurts our economy! On top of that Canada is well known as not a really productive country compared to the US. We could have a competitive advantage with this!





Well, the reason is really simple : NAFTA. North American free trade agreement. I love the name! Free Trade, haha.



The thing is, the article 605 in NAFTA only allows us to reduce exports to the US if we cut out domestic supplies by the same proportion! We also can't charge the US more than Canada.



You understand the problem now? WE HAVE to. It's not Free trade, it's called : Some politician thought it would be a good idea but we got ripped off.





I just wanted to make this clear !



Valmont.

 

[bizaro86]

That is absolutely and unequivocally NOT the reason we sell our oil for a lower price than we import oil.



Oil in the North American midcontinent (roughly Alberta to Oklahoma and the US midwest) is trapped. There is so much new production (oilsands, bakken, etc) that the price has gone down. (Supply up, price down is econ 101). The world supply and demand situation is different, and the prices everywhere except for that area are higher.



Oil companies aren't run by idiots, they'd sell their oil to the highest bidder if they could. But pipeline capacity is very limited from the producing areas in N. America to the coast. So there isn't enough capacity to get the oil to Eastern Canada and/or world markets.



If Enbridge reverses their line from Ontario into Quebec you'll see oil from Western Canada flowing further East, which will displace high cost imports. You also may have noticed a large decrease in the differential between world oil prices (Brent) and N. American interior oil prices (WTI) recently. That was due to the announcement that the seaway pipeline reversal will proceed ahead of schedule to transport oil from Cushing to the Gulf Coast of the US.



Once we get the pipelines we need, our exports and imports will be at the same price. (When adjusted for quality, since the oil imported is generally higher quality than the oil exported.)



Regards,



Michael

 

[MaximeValmont]

Pipelines won't change anything to the article in NAFTA.



I have no idea what you are talking about, but you might be right. Let's see when these pipelines are built

 

[Thomas Beyer]

Michael (bizarro) is right on the money. More oil is produced in the West and mid-west than can be consumed there. More oil is consumed in the East of Canada and the US as more people live there. The pipeline capacity west to east is low, and expansion is doable, but due to its sheer length of 3000+ km is far more expensive than going west, north or south from Alberta.



A second, larger east-west pipeline may be done though, in time, even, assuming XL gets built and Northern Gateway does not due to to much BC resistance.



You also see huge price differences in natural gas between N-America and Asia or Europe, again due to supply and demand imbalances. Hence the building of large LNG terminals at the Northern BC Coast and also on the East-Coast.

 

[MaximeValmont]

You are telling me it's cheaper for the East Coast to ship Oil from Saudi Arabia than from Alberta?

 

[bizaro86]

[quote user=MaximeValmont]You are telling me it's cheaper for the East Coast to ship Oil from Saudi Arabia than from Alberta?





Absolutely. Tankers and pipelines are by far the cheapest way to move oil. Since there aren't any pipelines from the West to Quebec/Maritimes, oil would have to go by rail (but there aren't good terminal options) or by trucks. Which would be prohibitively expensive.



The NAFTA thing is technically true, but an uneducated red herring by that author. We're not allowed to stop selling oil to the US politically (ie, NEP export tax type stuff). But we can sell our oil to the highest bidder, which would be the world market once we get our oil to somewhere it can go on a tanker. Once we have a choice, some oil will go to the world market, and the Americans will have to pay us the world price for what they buy.



I was at a CAPP (Canadian Association of Petroleum Producers) event recently where the former US ambassador to Canada spoke. He mentioned that he'd love for us to keep selling them cheap oil, but understands why we wouldn't want to, and specifically mentioned the pipeline extensions as being a good reason to continue investing in Canada.



There is currently one small pipeline from Alberta to the westcoast, and some oil that goes that way does get world market prices. This article is about Canadian crude going to China via that line. http://www.calgaryherald.com/business/Cenovus+sends+first+crude+shipment+China/6161268/story.html



Regards,



Michael

 

[MaximeValmont]

Wait wait wait,



Look I don't know anything about the Oil business so you are probably right, but you are telling me that shipping oil from Saudi Arabia is cheaper than shipping it from Alberta? How is that Even possible?





I know a pipeline is cheaper than Railroad. But shipping oil from Saudi Arabia is cheaper than Alberta by rail? It has to go from Saudi Arabia, Then by truck or Railroads it goes to a ship, thennnnnn it goes to the East Coast, where it probabl goes by truck or by train.



I don't know. The explaination you gave me actually makes sense. But I just don't get how it's cheaper to import internationaly rather than from Canada. That's why I thought it was The NAFTA.

 

[JimWhitelaw]

[quote user=MaximeValmont]But I just don't get how it's cheaper to import internationaly rather than from Canada. How come it is cheaper to fly to Hawaii than to drive? Which has a greater airspeed velocity, an unladen swallow or a magic unicorn? The capacity to move the required quantity of oil eastward simply doesn't exist.

 

[MaximeValmont]

But why?



Why is it cheaper From Sausi Arabia than Alberta. It seems to me as it's way more trouble to ship Oil from Saudi Arabia than from Alberta by Railroad.

 

[bizaro86]

[quote user=MaximeValmont]Why is it cheaper From Sausi Arabia than Alberta. It seems to me as it's way more trouble to ship Oil from Saudi Arabia than from Alberta by Railroad.





You can keep asking that question, but the answer is the same.



1) It is cheaper to ship oil by ship from the middle east to the east coast of N. America than it is to railroad it from the west to the east coast. A VLCC moves approximately 2,000,000 barrels of oil. It would take about 25 days to travel that distance, and VLCC rates are currently 10-20,000 per day. So it would cost $20,000*25 days/2,000,000 barrels = $0.25 per barrel to move the oil.



I've seen industry estimates of $10-$20 PER BARREL to move oil by rail. This article indicates $12. http://articles.philly.com/2012-03-16/news/31201790_1_crude-oil-light-sweet-crude-refineries/2



So moving oil by tanker from the middle east is ~50 times cheaper than moving it by rail. That may not make sense to you, but it's a fact based on the energy and capital efficiency of ships compared to railroads.



2) None of that actually matters. The differential between N. American prices and world prices is so great that it makes economic sense for producers to transport oil by rail. But the infrastructure necessary to transport oil by rail is built to a very small scale, so it's hard to move large volumes. Many companies are constructing rail loading/unloading terminals, but that takes time.



Until there is a large scale way to transport oil from the midcontinent to the coast (pipeline) the differential will exist. It has nothing to do with politics or NAFTA.



Regards,



Michael



Source for tanker rates: http://www.infomarine.gr/maritime-industry-news/forecast-daily-2012.html

 

[bizaro86]

[quote user=MaximeValmont]But shipping oil from Saudi Arabia is cheaper than Alberta by rail? It has to go from Saudi Arabia, Then by truck or Railroads it goes to a ship, thennnnnn it goes to the East Coast, where it probabl goes by truck or by train.





A lot of the assumptions you're making here are incorrect. Oil from Saudi Arabia/Middle East/West Africa doesn't go to a ship via truck or railroad, it goes via a dedicated pipeline. Then the ship docks either right at the refinery or at a pipeline connection, and the oil is transported the short remaining distance by pipeline.



Regards,



Michael

 

[MaximeValmont]

Wow, 50 times cheaper. Impressive. I would have never guessed it's actually cheaper to import from Saudi Arabia. It's so far...and they have to actually ship it to the port, then the boat, then train...The only reason that made sense then was some rules like NAFTA. Anyway,



Thanks for your insight on the Oil business Micheal!

 

[Thomas Beyer]

[quote user=bizaro86]There is currently one small pipeline from Alberta to the westcoast, and some oil that goes that way does get world market prices. This article is about Canadian crude going to China via that line. http://www.calgaryherald.com/business/Cenovus+sends+first+crude+shipment+China/6161268/story.html


Indeed .. the existing Kinder-Morgan pipeline. An expansion is planned .. but as expected the left-leaning Vancouver Mayor Gregor Robertson is opposed: http://www.vancouversun.com/Pipeline+plan+brings+debate+Vancouver/6477089/story.html



and of course our native brothers have their hand out too and are opposed:

http://www.vancouversun.com/business/North+Vancouver+Tsleil+Waututh+Nation+opposes+Kinder+Morgan+pipeline+expansion/6478714/story.htm



When do they start teaching kids in school that much of Canada's enviable position in the (first) world comes from extraction and monetization of physical resources such as water, gas, oil, oilsands, coal, copper, diamonds, uranimum, gold, nickel ?

 

[Thomas Beyer]

[quote user=MaximeValmont]But I just don't get how it's cheaper to import internationaly rather than from Canada.
Oil gets loaded onto ships in Saudi Arabia, and ends up in the Gulf of Mexico, Europe, Asia or up the St. Lawrence River .. close to major urban populations: Toronto, Quebec City, Halifax, Montreal .. all by boat. Cheap.



Funny how no one objects to multiple tankers a day up the St. Lawrence, but an oil tanker 2x/week to the West Coast destroys the rainforest and threatens inland communities 120 km away from any water or pipeline ???



The main issue is that BC carries much of the environmental risk of a pipeline burst or oilspill on the coast, but gets little of the benefits. It is a money distribution issue, i.e. a political issue that could be easily solved by writing a large enough cheque to first "nations" along the way or the BC Government.



Also, BC has a thriving gas business that it rather monetizes. Huge expansion in Kitimt for gas compression stations to turn gas into LNG (Liquified Natural Gas) for Asian exports - very profitable for BC: http://www.vancouversun.com/business/Ottawa+approves+export+licence/6446294/story.html or here: http://www.vancouversun.com/business/Asian+energy+giant+seeks+deal/6401819/story.html

 

[DanieLL]

Thomas and bizaro86 are bang on.



Also, a detailed analysis in those statistics gives even more insight.

Most of the gasoline stock is imported as it's almost impossible and it's a financial suicide to build new refinaries.



I guess we'll have to live with these "Unintended consequeces" for the near term.

 

[MaximeValmont]

http://business.financialpost.com/2012/05/09/is-rail-a-viable-alternative-to-oil-pipelines-sp/



Am I missing simething here? This article clearly say that Rail is not that much more expensive than pipeline. Also, it is way faster by Rail. And the infrastructure for rail is 10 times less than for pipeline.





The maths in this threat just doesn't make any sense.

 

[bizaro86]

Most of the math above was about shipping oil, which is definitely the cheapest method. Pipelines are still much cheaper than rail, but they're choosing a special transportation case, bitumen. That matters for a couple of reasons.



1) Bitumen is much more viscous than regular oil, so it is very difficult to get it to flow. That makes it more expensive to transport by pipeline.



2) Because pipeline capacity is in short supply, the price for it has gone up. That's especially true for bitumen, because a pipeline can move less bitumen in a day than it can regular oil because of #1. So the pipeline operators charge more.



So in an absolute worse case scenario for pipelining, it's still cheaper than rail, but not by as much.



Ultimately, the reason companies are choosing to move oil by rail isn't that it's cheaper than pipeline, it's that pipelines don't go where the oil needs to go right now, so to get a better price they're using rail which is more flexible.



There will be a huge change in the incentive to do this when the seaway reversal opens up in about a week.

 

[MaximeValmont]

Interesting. Thanks for the insight.



Looks like you know this business really well!