https://www.nationalobserver.com/2019/01/13/opinion/myths-die-hard-santa-claus-and-canadas-oil-discount
[Not only was the 'Alberta Energy Crisis' manufactured by the oil
industry, even an outsider had managed to predict it. This piece
continues to delve into the oil industry disinformation campaign.
Oh, as an irony, prices for bitumen-based 'crude oil' (WCS) have
recovered so much and so fast, they are now over-priced compared to WTI,
which will make them economically less attractive. It's the law of
supply and demand, which the oil industry claims it understands, but
clearly does not.
links and images in online artice (Takeaway Capacity vs Production
infographic is particularly illuminating)]
Myths die hard: Santa Claus and Canada's oil discount
By Will Horter in Opinion, Energy, Politics | January 13th 2019
Myths die hard. For example, a third of Canadian adults say they still
believe in Santa Claus. Myths endure because they serve a purpose, good
or bad. Our job, as responsible adults, is to figure out where a myth
comes from and whether it still serves our best interests.
The myths of Santa Claus and the lies about exaggerated claims of a
Canadian oil discount (detailed in my Discount Frenzy article) persist
because they serve potent interests. Santa evokes powerful nostalgic
forces as well as mystical yearnings for comfort and joy. Yet good,
noble values are exploited by advertisers and retailers to encourage
rampant materialism and overconsumption.
It’s harder to justify the three Big Lies surrounding the alleged
Canadian oil discount — they serve the interests of Big Oil, arguably
the most powerful industry on earth. They are fighting hard to maintain
these lies as the attacks on my previous National Observer article
illustrate.
Not surprisingly, supporters of the controversial Trans Mountain
pipeline, like consultant Blair King and journalist Markham Hislop, took
exception to my arguments. However, a close examination of the critics’
claims reinforces my conclusions.
Recap
Like the little boy in A Christmas Story who was wrapped too tight in
winter clothes, Alberta Premier Rachel Notley and United Conservative
Party Leader Jason Kenney in Alberta, along with Prime Minister Justin
Trudeau and Finance Minister Bill Morneau in Ottawa, have clothed
themselves with so many big lies about discounted Canadian oil that they
can’t move. Their lies, like the little boy’s overstuffed winter jacket,
no longer provide protection, but rather create unnecessary risk.
Big Lie #1: The So-Called Alberta Discount: There is no “discount” on
Canadian oil. The price differential is related to its lower “quality”
and higher transport and refining costs. When you are trying to sell
Aunt Jemima syrup you don’t call the price gap between that and pure
maple syrup a “discount.”
Big Lie #2: Absurd claims about $80-$100 million in daily losses: The
Trump-like claim fabricated by multiplying the fictitious discount on
oil by total oil production to come up with a outrageously inflated cost
to the economy.
Big Lie #3: Trans Mountain will solve Alberta’s price problem: The
erroneous claim that forcing the Trans Mountain pipeline through B.C.
will open up new markets in Asia and fix Big Lies #1 and #2.
This veritable Hat Trick of #BigLies is impressive: They use discount
frenzy (Big Lie #1 about the co-called oil discount) to allege an $80
million a day national economic crisis (Big Lie #2 about staggering
economic losses) in order to support the Trans Mountain oil
tanker-pipeline expansion proposal as The Solution to the fictitious
price discount (Big Lie #3 about opening new Asian Markets).
Before we delve into a point-by-point response to the critics, it's
worth noting what my detractors don’t dispute. Neither King, nor Hislop,
say one word to contest my conclusions about the preposterous claim that
Canada suffers $80-$100 million in daily losses because of the oil
discount (Big Lie #2). Apparently even some of Trans Mountain's biggest
boosters can’t stand behind this whopper, even though it serves as the
foundation of the deceptive advertising campaign that Notley’s
government is spending millions of dollars of taxpayer money on.
When you take a moment to stand back from all of this, you have to ask
yourself, ‘who stands to benefit from you believing this story?’
Now to the specifics.
Low “quality” of Canadian oil
Blair King claims I’m wrong to label Canadian heavy oil as a
“lower-quality product.”
The thing is, it wasn’t me that used that label, it was Canada’s
National Energy Board (NEB), the federal agency that regulates pipelines.
The term “quality” is subjective. Technically, Canadian oil is a lower
“grade.” Like maple syrup, oil comes in a variety of grades, with
heavier oils and maple saps being darker, grittier, with thicker
viscosity, and more mineral contaminants — thus getting lower grades.
The various grades of maple syrup and oils are confusing to most people
so, writing for a general audience, the use of lower "quality” is
justified, and to King’s chagrin, Canada’s NEB agrees.
The NEB concedes that Canadian heavy oil is an inferior grade: “Heavy
crudes are lower quality than light crudes because they yield a lower
amount of high-value end-products, like gasoline and diesel."
Now I may not agree with the NEB on many things, but the matter of
grading crude is straightforward. Simply put, King is wrong about the
lower quality of Canada’s heavy oil.
Price cut is driven by higher costs (and markets)
In my Discount Frenzy article, it seems I struck a nerve when I pointed
out that not all oil is created equal. Just as not all the chocolate or
syrups we get in our Christmas stockings are equally valuable, “[t]he
simple fact is that not all oil is equally valuable. The price for a
barrel of oil depends on many factors: the type of oil, the difficulty
and cost of refining it, as well as the cost, distance and method needed
to transport it.”
Hislop, after agreeing with me that the primary drivers of the so-called
discount are the “lower grade and higher transportation costs that
create an historic discount in the $10 to $15 range,” claims I failed to
acknowledge the impacts, “when there is more oil than the existing
pipeline system can handle.”
His point is simple supply-and-demand economics. When there is more
product than the market can handle, prices drop.
The problem with Hislop's claim is that it’s made up. Just like Will
Ferrell’s character doesn’t become an elf just because he yearns to fit
in, a pipeline bottleneck isn’t real just because Big Oil and their
loyalists keep whining about it. Despite Alberta’s bellyaching,
historically there have been very few times where a glut in oil
production exceeds pipeline capacity for any significant length of time.
The fact is that until just a few months ago there was no pipeline
bottleneck, there was more pipeline capacity than oil flowing. This
means that, except for when pipelines are shut down (because they have
leaked), or were operating at reduced capacity by government order
(because of safety issues), a lack of pipeline capacity doesn’t explain
the historic discount.
Hislop attacked me claiming my column wasn’t backed by “facts and data,”
but it is he that ignores the data and relies on industry propaganda.
Using hard data on actual shipments, a July 2016 Oil Change
International analysis concluded, “there is more than 400 thousand
barrels per day of spare capacity in the existing pipeline system. It is
likely that the oil industry could face one minor constraint, lasting no
longer than 18 months around 2018.”
The reality is, despite Hislop’s claims, Oil Change International’s 2016
analysis and predictions are coming true. There is a short term heavy
oil glut, exacerbated by pipelines running at reduced capacity for
safety reasons as well as bottlenecks created by heavy oil refineries
shutting down for maintenance and new facilities.
Price ≠ Quality
King tries to obscure the “lower quality” oil fact by quoting other NEB
statements that Canada’s heavy oil — in certain circumstances — is sold
at a premium. King’s argument in essence is: if it sometimes garners a
higher price, it can’t be lower quality.
Oil, like maple syrup, comes in different grades, and the price buyers
are willing to pay depends on many factors: supply market, availability
of inputs, world conditions, competition, weather, geopolitical issues,
technical issues, demand market, cost or processing, cost of transport.
Just because in certain circumstances someone is willing to pay a
premium price doesn’t make something a premium or higher quality product.
For example, if you had a bottle of larvae-infested pond water you could
sell it at a premium to someone dying of thirst in the desert. However,
that doesn’t make the dirty pond water clean, pure, disease-free or
valuable to the average person.
Back to the maple syrup analogy.
You have a choice if you live in Quebec and produce maple syrup.
You can boil (refine) the raw sap yourself into the tasty syrup people
want to buy for their waffles, or you can sell the sap raw. No surprise,
those that refine it themselves add value and get a higher price in the
marketplace.
Refined, the maple syrup market is huge. Raw not so much. Every Safeway,
Loblaws and Save-on-Foods in Canada has shelves full of refined syrup,
with the price dependent on the quality one is willing to pay for. The
darker the syrup is, the more delicate its flavor, and the longer it has
usually been boiled.
If you want to sell it raw, however, you have to find someone that will
buy it and your market shrinks drastically. Your potential customer base
shrinks to companies that can boil (refine) the raw sap down to
something useful to the average person. Refiners that have big boilers
can get raw sap from anywhere, the price they will pay depends on the
volume you can provide, the transportation costs, the quality (which
determines refining costs), and whether your competition is willing to
pay more for raw product.
If there are more boilers in a particular region, then transport costs
are usually lower and competing boilers may occasionally have to compete
for raw maple.
The same dynamic is at play with Canadian oil. Certain regions, like the
U.S. Gulf Coast, have lots of refinery capacity and setups that can
handle heavier, sulphur-tainted bitumen. Under the right circumstances,
Gulf refiners will sometimes pay a premium because they have facilities
to cook (refine) the heavy oil more efficiently. Unfortunately for
Canada, most refineries, like most maple syrup consumers, like the
refined lighter grades and aren't willing to pay for the rawer product.
Is Canadian heavy oil more valuable?
While both Hislop and King admit that Canadian oil is more expensive to
refine, they argue that it is also more valuable. King says, “heavy
crude, refined in a heavy crude refinery, gives higher margins and less
waste than light crude refined in a light crude refinery. The heavy
crude costs more to refine but recoups more per barrel, which results in
higher returns…[when] sent to high-conversion refineries in the Gulf
Coast, the Midwest and in Asia where heavy crude produces higher margins
and more product per barrel with less waste.” (Emphasis added)
Obviously, if you can get Canadian heavy oil to the right refinery, you
can sometimes get a higher price. Refineries, if they are willing to
invest in all the extra costs of building a more complex facility that
can handle the heavy, more polluted bitumen, and the extra energy needed
to process into a variety of products, can make more products and more
money from the heavy crude.
King critiques me using a logical fallacy called a straw person
argument. He gives the impression of refuting me, while actually
refuting an argument that I never made. It’s the smoke and mirrors
arguing technique in logic.
I have never disputed that once delivered to a region with a high
concentration of heavy oil refineries that Canadian oil can collect
higher prices.
But the problem for Alberta, Trudeau and oilsands cheerleaders is that
there just aren’t that many heavy crude refineries and, despite a
multiple decade-long call to build new capacity in Alberta, hardly
anyone wants to invest the billions of dollars needed to build more.
Limited refining options and lots of heavy oil from around the world,
plus higher transport costs, equals lower prices.
King goes on to critique me by citing the price difference between
Mexican Mayan Crude and Canadian WCS, claiming that the “difference in
price is due to Alberta WCS being land-locked, plain and simple.”
First, King ignores the fact that Canadian heavy oil has significantly
more contaminants such as heavy metals than Mayan crude, making it less
desirable and more expensive to refine.
Second, King makes a serious blunder and inadvertently substantiates my
argument — he overlooks a crucial factor by omitting the key difference
between Mayan and oilsands crude prices.
The price King cites for Mayan crude is the delivered price in the Gulf
Coast. Canadian heavy oil price is lower because it still has to be
shipped all the way south. In other words, the higher transport costs
for Canadian oil explains the price differential, not some imaginary
country discount.
No historic backlog of oil
Markham also critiques me using a straw person logical fallacy. His
straw person is the oil glut.
The fact is that I’ve never disputed the claim that there is a currently
“a backlog of oil waiting to get to market.”
But the historic discount is pure propaganda. As I documented above, oil
supply seldom exceeded pipeline capacity until this fall. The current
glut has nothing to do with the Canadian oil discount that Alberta has
been whining about for years.
No doubt, the oilsands are presently in a pinch. But the challenges
Alberta currently faces were predicted and largely of their own
creation. As I concluded in Discount Frenzy, decades of bad choices by
the oil patch and bad policies by successive governments have left them
vulnerable to booms and busts. Unfortunately successive Alberta
governments ignored the warnings, but now they want Canada to bail them
out with further subsidies and climate unfriendly policies.
Despite his reverence for “facts and data” Hislop relies on questionable
data to posit an ongoing glut and pipeline shortage. Markham relies on
projections from Big Oil’s lobbyist, the Canadian Association of
Petroleum Producers (CAPP). We all know corporate lobbyists are unlikely
to provide unbiased data.
Hislop fails to mention that CAPP has a long history of inaccurately
overestimating production projections. Oil Change International
effectively critiques CAPP’s inflated pipeline projections, pointing out
that they consistently overstate the alleged pipeline capacity
bottleneck by undercounting domestic refining capacity, excluding rail
capacity, and overestimating the timing and volume of new facilities.
Building Trans Mountain won’t solve Alberta’s woes
Like Ralphie in A Christmas Story, who believes his problems will all be
solved if he just gets a BB gun for Christmas, my critics join Premier
Notley and Prime Minister Trudeau in believing that building the Trans
Mountain will solve Alberta’s problems. We fundamentally disagree over
whether using massive amounts taxpayer money to force the pipeline
through an unwilling province is a realistic solution to Big Oil’s troubles.
My proof that Trans Mountain isn’t the solution is the fact that despite
all the talk of new Asian markets virtually no oil has been shipped to
Asian through the existing TMX pipeline to Burnaby in years.
Why?
Because heavy oil sells at a lower price in Asia, not a premium. Like
greedy children on Christmas morning, oilsands producers don’t want to
accept less than they can get elsewhere.
Like Bad Santa, King tries to discredit me with another straw person
fallacy, Knocking down an argument I never made by misrepresenting a
tweet I sent him.
Here’s how King does it: he goes to great length (with charts and
quotes) to show that all the current Trans Mountain output goes to
refineries in B.C. and Puget Sound via pipeline with what little that
remains shipped abroad on oil tankers going to California.
He posits this to counter me, but I have never disputed those facts.
What I did dispute was his theory that any increased capacity from Trans
Mountain would be shipped to Asia. I called that a “nice theory”
Here is part of the exchange.
Oil patch producers can choose where, and to whom, they sell their oil.
Despite all the whining about (1) the big mean U.S refineries
discounting Canadian oil, (2) the need for pipelines to tidewater to
access new markets, and (3) the potential of huge new markets in Asia,
the oil patch have CHOSEN not to sell virtually any of their bitumen to
Asia. The reason: oilsands producers get lower prices in Asia because of
limited refining capacity and much higher transport costs.
Unless making a wishlist to Santa can suddenly make the higher refining
and transportation costs of heavy oil disappear (along with the upcoming
IMO 2020 sulphur standards which prohibit sulphur laden oil from being
used in marine shipping), selling Canadian oil to Asia won’t deliver a
premium. The higher transport costs and lower prices won’t disappear
magically because Trans Mountain is built. More likely, prices will drop
as usually happens when you dump more product into a depressed market.
Other than his straw person fallacy, King provides no evidence that any
additional capacity from Trans Mountain will end up in Asia. My guess:
in the unlikely event that Trans Mountain ever gets built, Big Oil will
do everything possible to send all the additional oil to existing west
coast refineries where they get a higher price.
Although Hislop repeatedly extols his reliance on “facts and data,” his
defence of the controversial Trans Mountain oil tanker-pipeline proposal
rests almost entirely on CAPP’s puffed up production projections
discussed above.
Hislop doesn’t dispute the fact that heavy oil attracts lower prices in
Asia, so even if you accept his dubious capacity calculation as true
(which it’s not), his assertions don’t support building the Trans
Mountain to Burnaby, rather they bolster plans to build more pipelines
to the Gulf Coast.
Canada faces a choice if we want to do our part in reducing climate
pollution. We can choose the path of many other countries (exempt
Trumpland) and invest in renewable energy like wind and solar and energy
conservation, or Notley and Trudeau can subsidize Big Oil with money and
lax policies to support their desire to grow oil production. Unless
government sets climate-friendly caps, industry will continue to build
out and Canadian oil production will rise — although not as fast, or as
high, as Markham and CAPP predict — and new pipelines will be needed.
However, with approved pipeline underway to existing heavy oil
refineries, it makes no sense to spend enormous political capital and
taxpayer money to try to force Trans Mountain through.
False myths are dangerous
It's apropos, just after Christmas, to reflect on how myths, like Bruce
Willis, Die Hard. Belief in Santa Claus persists because it provides
comfort and joy for many people. But also because powerful advertisers
promote Santa to double the number of presents that parents have to buy
for their kids, thus encouraging materialism and excess spending.
Powerful forces also want us to believe in Big Lies about oil.
Unfortunately, Premier Notley, Alberta Opposition Leader Jason Kenney
and Prime Minister Trudeau are putting a dangerous, and misleading spin
on myths about Canadian oil. Myths could be used to help us transition
to a renewable future. Instead they are being used to rationalize the
status quo and insulate and protect the most powerful among us.
Industries are built and die on these myths. Governments rise or fall on
these myths. They affect the choices we as a society make for today,
tomorrow and for our children's future.
Unfortunately, there are no real world angels to counsel our political
leaders off the suicidal course like they did for Jimmy Stewart’s George
Bailey character in It’s a Wonderful Life.
If we are going to create a liveable world for our children, we’d better
distill the myths that enhance life from lies that put us at risk from
the chaos caused by living beyond natural limits.