Canada tries to cool oil price anxiety

COMMENT: In this article, T. Boone Pickens is quoted: "... price is going to continue to rise until you kill demand." You don't need to be a market fundamentalist to understand the essential logic of this comment. On the other hand, the amazing price of oil today is hardly explainable just on supply-demand fundamentals. The Bye, Bubble? article from Barron's which I've sent out with this email, proposes that the price of oil may be significantly influenced by commodity investment and speculation - a "bubble", unsupported by fundamental conditions. It also notes that the high price of oil corresponds to high share prices for oil producers - and share prices will be the first to collapse if the price of oil collapses. Hmm.

Nothing should have advanced the climate change agenda more, and reduced fossil fuel use more effectively, than the recent screaming rise in oil prices. Had a carbon tax been applied around the world that had that effect on oil prices, the governments that created the taxes would have been unelected, juntad, couped, assassinated en masse. Yet the increase in the price of oil has not been accompanied with a corresponding reduction in global demand. Why is that? Inelasticities in the oil market? The Exxon Valdes effect - big things are slow to respond?

It suggests to me that carbon taxes, even whacking great ones, might not be as effective as we have hoped.

Shaun Polczer
Calgary Herald
Sunday, June 22, 2008

CALGARY - Canada is pushing for more transparency in global energy markets at a special meeting of producing countries in Saudi Arabia, Natural Resources Minister Gary Lunn said Sunday.

Speaking from Jeddah on Saudi Arabia's Red Sea coast, Lunn said Canada has a role to play in calming jittery oil prices that have more than doubled from a year ago.

"All of the countries recognize this is a longer-term problem," he said following the meeting of big oil oil majors and producing countries.

Although Canada accounts for less than three per cent of the world's oil production, it sits on 15 per cent of the world's reserves - second only to Saudi Arabia - mostly concentrated in northeast Alberta.

"It was recognized that there is an adequate supply of oil reserves that remain for decades to come, but we do need to make strategic investments in development of some of these reserves as well as refining capacity."

Despite its relatively small share of the world oil market, Lunn noted that Canada is one of the few countries capable of significantly increasing production.

The Canadian Association of Petroleum Producers said last week Canada's output will nearly double to 4.5 million barrels per day by 2020. More than $100 billion worth of investments are on the books to triple oilsands production which is currently supplying slightly more than one million barrels per day.

Lunn described a "very co-operative approach" at the meeting, which committed to increasing oil production in a manner that recognizes the impact on the environment.

At the meeting, the Saudis suggested they would increase production over and above the 200,000 barrels per day they pledged last week.

But speaking in Calgary Friday, legendary Texas oil man T. Boone Pickens called the Saudi's additional production "peanuts" and said at least world two million additional barrels per day are needed to make a meaningful dent in oil prices.

He said blaming speculators for higher prices is "silly" and told the U.S. Senate last week that global oil production has peaked at 85 million barrels per day.

"So, what is going to happen is that price is going to continue to rise until you kill demand."

Earlier Sunday, King Abdullah said Saudi Arabia is not to blame for soaring oil prices, blaming speculators and surging demand in such developing economies as China and India.

"There are several factors behind the unjustified, swift rise in oil prices and they are: Speculators who play the market out of selfish interests, increased consumption by several developing economies and additional taxes on oil in several consuming countries," the king said in speech.

Despite their best intentions, doubts lingered as to whether the meeting will have an impact on oil prices.

"What I've heard so far are basically all good ideas, but it will probably not change the price tomorrow morning," Royal Dutch Shell CEO Jeroen van der Veer told Reuters in Jeddah.

Energy Minister Mel Knight of Alberta Friday told the Illinois Chamber of Commerce on Friday he expects oil prices to "spike" to $200 and said anything over $150 would damage the world economy.

Gerry Protti, an executive vice-president with Calgary-based EnCana Corp., also doubted whether the Jeddah meeting would accomplish its stated goal of lowering oil prices.

Speaking at the company's investor day on Thursday, Protti said Canada is a "price taker" rather than a "price setter" in the world market. He also said Canada is a marginal player despite its position as the number one supplier of oil and products to the United States.

"It's a market driven by huge forces, of which Canada, from a supply side, is one relatively small component."

There is also the question of whether lower oil prices are actually good for Canada and could threaten the economic viability of oilsands production.

Canada has consistently been pegged as one of the planet's highest-cost suppliers by advisory firms such as J.S. Herold in Connecticut.

Oilsands producers like Canadian Natural Resources' Steve Laut have said the company needs at least $75 US a barrel to cover costs and generate "acceptable" rates of return.

Speaking at the OPEC summit in November, Saudi oil minister Ali al-Naimi said Canada's "sands of oil" rely on unsustainable oil prices to be economically viable.

spolczer@theherald.canwest.com

© Calgary Herald 2008