Thursday, October 23, 2008

Falling Oil Prices Suspend Canadian Sand Plan

Globe and Mail (Toronto) - Low Oil Prices Threaten Global Projects
Globe and Mail (Toronto) - Is it Game Over for the Oil Sands?
AFP - Petro-Canada Ups the Cost of Oil Sands Extraction Project

The rapid decline in the global price of oil over the past few months is throwing Canada's massive oil sands development into doubt. The Canadian oil sands, in the provinces of Alberta and Saskatchewan, are estimated to contain 173 billion barrels of oil, making them the second-largest proven oil reserves in the world behind Saudi Arabia. However, the enormous cost of extracting the oil makes the oil sand development dependent on high global oil prices. Global oil prices reached a low of $66 per barrel this week, down from nearly $150 a few months ago. Analysts have estimated that efforts to extract and sell the oil from Canada's sands would break even with oil prices between $70 and $85.

The Canadian oil sands, untapped as of yet, could potentially bring in $170 billion in foreign investment, making it an enormous source of potential economic development. Canada is already one of the world's largest oil producers, with the United States its biggest customer. One result of the financial crisis, in addition to high gas prices, has been lagging American demand for oil in the past year. U.S. demand for oil is down four percent from 2007. Plus, both U.S. presidential candidates have repeatedly stated their desire to invest in alternative energy sources and also tap more U.S. sources of oil.

Indeed, several Canadian firms have announced that their plans for the oil sands are on hold due to rising costs, declining energy demand, and a tight global credit market.

However, it's likely that oil prices will eventually rise again. The oil cartel OPEC is meeting and expected to announce a decrease in production of two million barrels a day in order to raise prices. Industry analysts note that declining proven reserves of easy-to-obtain oil combined with rising oil demand from Asia will lead global oil prices up from their current levels.

And, even if U.S. companies are not willing to invest in extracting the Canadian oil sand, a growing horde of state-owned oil monopolies around the world are likely to step in and help develop this potentially lucrative energy source.

1. Does Canada have an incentive to extract and sell the oil as quickly as possible because of the growing movement for alternative energy sources, or will crude oil always be in high demand?

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