Business·Analysis

The world is awash in oil — is Canada making it worse?

The world is producing too much oil for the demand, but Canadian oilsands production is still expanding. Are we just adding to the problem?

There's way too much oil on world markets, so why are oilsands producers still expanding?

Canada's oilsands continue to expand even in the face of an 18-month long oil glut. (Norm Betts/Bloomberg News)

Collectively, Canada's energy sector lost more than $600 million in the first three months of this year, and the Canadian economy shrank in the same period, as the collapse in oil prices took its toll.

Canada is not even the tail on the dog, it's like a few hairs on the tail of the dog- Judith Dwarkin, ITG Investment Research

Now, nearly 18 months after it started, the oil glut continues. 

At its worst point this spring, the world was producing four million barrels per day more than was being consumed. 

And Canada is playing a role in that oversupply.

Just last week, in fact, Imperial Oil announced that the second phase of its Kearl oilsands operation had started production ahead of schedule. When it fully ramps up in the coming months, the expansion alone will add 110,000 barrels per day to Kearl's production. That's around 40 million barrels in a year just from one expansion.

Other expansions in the works will see Canadian oilsands production increase by around 15 per cent this year to 2.3 million barrels per day. 

It raises the question: Are Canadian oil producers making the problem worse?

It's all about 'flavour'

For those who watch the Canadian scene closely, the answer is no. 

"Canada is not even the tail on the dog," says Judith Dwarkin, energy economist with New York-based ITG Investment research. "It's like a few hairs on the tail of the dog contributing to the global supply picture."

Indeed, when it comes to global supply, the issue is all about the flavour of oil.

The current problem is not with the heavy oil that is Canada's main export, but with the light oil that is being produced in Saudi Arabia and in the U.S. shale oil fields.

Of the extra production that came onto the market in 2014, 200,000 barrels per day came from Canada, while 1.3 million bpd came from the U.S.

And despite all the news of oil rigs being idled in the U.S., production in the U.S. between December and May was 15 per cent higher than a year ago, according to research by the TD Bank. Over the same period, Canada's production was only four per cent higher.

Blame the U.S.

So, it's not Blame Canada. It's Blame the U.S.

The demand for Canada's heavy oil remains strong, particularly from refineries in the U.S. Midwest which are set up to refine it.

Two decades ago, before the U.S shale oil boom was even a glimmer in anyone's eye, U.S. refineries began retooling themselves to refine Canadian heavy oil as that was all set to grow. Now, they can't change quickly to now refine the light oil that is being produced at home.

"Heavy oil is actually getting quite a good price right now, and the reason why is that those heavy barrels are still in demand," said Nicholas Lupick, an energy analyst with AltaCorp Capital.

"It's quite frankly in short supply."  

That explains why the price for Western Canada Select is trading at a relative small discount to the U.S. benchmark West Texas Intermediate. The Canadian price for WCS on Friday was just under $61 a barrel. 

No quick end to supply glut

TD Bank expects the world oil glut to persist through the end of this year and into 2016, and U.S. oil supply is expected to slow in the second half of this year.

The number of operating oil rigs south of the border has dropped each week for more than six months, and that should finally start to be reflected in oil production numbers.

However, there is no sign that Saudi Arabia will slow its production.

In fact, the investment bank Goldman Sachs suggested last week that Saudi Arabia will increase its oil output to its maximum level of 11 million barrels a day in the second half of this year. Goldman says the goal is to slow oil production growth in nations like Canada, the U.S. and Brazil.

If that does happen, it could cause another drop in prices. The acute U.S. storage problem, in which its Oklahoma tanks were filled to the brim, has eased, at least for the summer driving season. But they could well fill up again in the fall when the summer road trips come to a halt, which would send prices into another tailspin. 

At that point it won't matter if we blame the U.S. or Saudi, or ourselves for the oversupply. Every producer will feel the pain.

ABOUT THE AUTHOR

Tracy Johnson

Business reporter

Tracy Johnson is the executive producer of CBC's western digital business unit. She's been a business reporter/producer with CBC on radio, television and online for 15 years. @tracyjohnsoncbc

Comments

To encourage thoughtful and respectful conversations, first and last names will appear with each submission to CBC/Radio-Canada's online communities (except in children and youth-oriented communities). Pseudonyms will no longer be permitted.

By submitting a comment, you accept that CBC has the right to reproduce and publish that comment in whole or in part, in any manner CBC chooses. Please note that CBC does not endorse the opinions expressed in comments. Comments on this story are moderated according to our Submission Guidelines. Comments are welcome while open. We reserve the right to close comments at any time.

Become a CBC Member

Join the conversation  Create account

Already have an account?

now