Why the U.S. needs all the tar sands oil it can get

Wednesday, January 20, 2010 6:11 AM

Why the U.S. needs all the tar sands oil it can get

Jeff Rubin

Governor Arnold Schwarzenegger and his Midwestern colleagues had better think twice before banning carbon-dirty fuels such as the oil made from Canadian tar sands. If they don’t like the fuel Canada has to offer, their only other choice is to get off the road entirely.

Like it or not, synthetic oil from Alberta’s tar sands is going to figure ever larger at American fuel pumps in the future (provided that it isn’t siphoned off to China by a pipeline to the west coast first).

American oil demand may be diminishing as more and more drivers take the exit lane, but available supply is shrinking even faster. Domestic production, formerly 10 million barrels per day, is already down by half. The longer the U.S. economy has run on oil, the more dependent it has become on energy imports. Only finding those imports is becoming more challenging all the time.

Sources of oil from Mexico are already collapsing, and in a few years’ time that country will cease exporting it at all. The flow of oil at its once-huge Cantarell field, representing almost half the country’s oil production, will soon slow to a fifth of its former peak rate.

And I hope Governor Schwarzenegger isn’t counting on Venezuela, the western hemisphere’s other major oil producer, to fill that gap. The only additional production that country will have to offer is from its Orinoco tar sands, the same stuff he says is too dirty to take from Canada. Moreover, fueling carbon-conscious gringos in California as they cruise down their sprawling freeways probably doesn’t rank high on President Hugo Chávez’s to-do list.

As for the Middle East, it’s not political risk that California’s motorists have to fear. It’s more Ski Dubai and the 7-cents-a-gallon bunker fuel burned to generate electrical power, along with 40-cents-a-gallon pump prices, that they should worry about. OPEC member states already consume almost 10 million barrels a day of their own production, and with every rise in oil prices they can afford to consume even more, and in the process export less.

None of this is to suggest that synthetic oil made from Canadian tar sands couldn’t get a lot cleaner. Put a $50 to $60 per ton price on carbon emissions, and all of a sudden shareholders of companies like Suncor and ExxonMobil (or its Canadian guise, Imperial Oil) will demand that management find a way of emitting less—the same way putting a price on the millions of gallons of fresh water those companies pollute will suddenly make water conservationists of them as well.

But Mr. Schwarzenegger and his fellow governors should realize one thing before they ban dirty fuels. The reason the United States will be so dependent on Canadian tar sands is that there ain’t a whole lot else left.

After nearly 20 years as the chief economist of CIBC World Markets, Jeff Rubin left the bank earlier this year to seek a larger audience for the story he wanted to tell.

His predictions of steadily rising oil prices over the last decade, including $100 (U.S.) per barrel oil by 2007, had flown in the face of conventional economic wisdom. As he said, soaring oil prices demonstrated that the traditional laws of supply and demand were no longer working for one of the global economy's most basic and essential commodities.

The consequences would be severe. He argued that it wasn't sub-prime mortgages, but record oil prices that drove the world economy into its deepest post-war recession. And unless the economy starts to wean itself off an ever depleting supply of affordable oil, he believes there will be other recessions to follow as economic recoveries quickly push oil prices right back into triple digit range. But weaning our economy off oil means some fundamental changes in the way we live.

That's not the kind of message chief economists' at investment banks are supposed to deliver so he resigned from CIBC World Markets to write about it in his new book Why Your World Is About To Get A Whole Lot Smaller. See his website at jeffrubinssmallerworld.com.