Lamond: Why pro-rationing Canadian oil production is better than relying on a ‘free’ market

At the end of October, I published a piece suggesting short term pro-rationing could be an equitable way to solve the problem of heavy oil over production in the province of Alberta. Since then, there have been numerous articles in the press agreeing with my proposal but also many scorning it and suggesting the free market should solve this problem.

As a result of these comments, I would like to suggest the free market in regard to oil is a myth and reliance on this mantra will result in serious long-term consequences for the province.

I have observed in the past few years the politicization of Canadian oil production growth by various governments. We are all familiar with the terms “dirty way of extracting oil,” “phasing-out the oil sands” and lastly, “no long-term future in fossil-fuels” clearly demonstrating political intentions of impeding growth.

Each of these comments negatively impacted the so-called free trade in oil.

In addition,

1. Since the OPEC cartel was created in 1960, there has effectively been no free trade in oil. OPEC’s policy has been to restrict production as closely as possible to demand, and in times of crisis, to severely shut in production until demand and then prices recovered. Its impact on Alberta has been quite critical over the years. Without OPEC restraint, oil prices would be so low that virtually all of Alberta oil production would have been uneconomic.
2. There is currently no free trade in energy in Canada. Political interference has greatly thwarted the building of pipelines to remove surplus supplies of oil from Alberta. The capricious cancelling of the most logical pipelines, Northern Gateway and Energy East, impacted heavy oil and conventional producers in that their estimates of the expansion of take-away capacity were torpedoed. Newly proposed guidelines for pipeline approvals, in Bill C-69, are similarly designed to thwart normal regulatory procedures which, in the past, allow businesses to make decisions on take-away capacity.
3. There is clearly a dichotomy of opinion between producers and production companies with refinery affiliations. Most producers would be happy to sell less oil at substantially higher prices, while the refinery affiliates clearly benefit from access to ridiculously low oil prices. However, it seems the oil price benefit has taken a long time to transmit itself to lower gasoline prices. A compromise between these two groups would require the wisdom of Soloman but must be attempted.
4. Energy companies themselves cannot meet to agree to restrain production as they would be subject to anti-trust sanctions. In addition, the nomination of “air barrels” has to be dealt with in a regulatory fashion. Hence, only  Alberta, which ultimately owns its oil, has the authority to manage production rates in the interest of all Albertans, and also prevent the wasteful use of the resources. Alberta is coming to realize that through royalties, taxes and employment, a healthy energy industry is necessary for its financial well-being.
5. If nothing is done, we could face potential monopoly problems. A protracted period of low oil prices could lead to the elimination of the intermediate and junior sector of the energy business. This would come about because of a lack of capital for smaller companies, inability to access pipeline space, and logically opportunistic bids for these companies’ assets while they are dead in the water.

Finally, Albertans have to realize we are in a second energy war: NEP 2.0. Yes, this is a repeat of the National Energy Program controlled by Ottawa. The impoverishment of Alberta appears to be of limited concern to the current Ottawa government. Imports of oil from Saudi Arabia, Iraq, Algeria, Angola and Mexico are still thought of as reasonable. Indeed, Maya crude, which is similar to WCS, attracts a premium price to WTI, this week $59.50, compared with the identical Alberta product, this week at $11.40 USD.

Last, I notice the rebates from the Ottawa carbon tax will be paid directly to citizens. I’m sure that is to enable all of us plebeians to clearly identify the power that is also supplying our bread and circuses!