Peter, your first column on how North American demographics are working against the oil industry was an interesting read. Do you see this trend of less driving among young people continuing to accelerate?
Yes I do. And it's not only younger people. I believe that the 'virtualization' of people will expand into older demographics too.
A major issue has been that we've been selling our oil at a discount because of transportation restrictions that have resulted in a glut of supply. When do you see this problem subsiding, and how will it be resolved?
This issue of selling Canadian oil at a substantial discount to global prices is likely to continue for a few years yet. Infrastructure is adapting to the new realities of oil supply and demand, but it's not reacting as fast as the changes on the supply and demand sides.
That's a good point. Peter, what about smaller centres without good transit? Does the theory still hold?
Yes, actually it does. The greatest drop in driving is actually in rural areas, not urban. The stats show that more people are shopping online and forfeiting trips to the stores.
Alberta's Premier calls it a Canadian Energy Strategy. I subscribe to her initiative that all Canadians need to start a dialog about energy, how it's a major contributor to our prosperity from coast to coast. So the idea of an energy strategy right now is to start talking about the changes happening.
Absolutely. But in this regard we are a peculiar country. We produce way more than we consume and export most to the US. The east gets most of its oil from abroad. In the 1950s we decided not to build the X-Canada infrastructure to make us energy secure. Now is the time to rethink all of this.
Peter, you know crude oil markets well. What’s your prediction for where oil markets are heading? Is there much further downside risk given the state of affairs in Europe and how do you see demand panning out in Asia over the next few years?
The biggest risk to oil prices is the global situation. I'm not as concerned about Europe as I am about China. Half of new consumption growth is from China, so when they slow the price will weaken. Also, we should expect to see a moderating trend in their consumption growth due to efficiency gains.
Peter, any reaction to this?
I agree that oil is a very valuable fuel. It has tremendous utility that no other fuel can easily match (that's why it's difficult to shake the addiction). Yet diversification of our transportation systems should be an important imperative for many reasons, including as you point out husbanding a valuable resource.
Criticism of Northern Gateway is a hurdle. I wouldn't say foreign ownership of oil sands is, however. Canada's oil and gas industry has a long history of foreign ownership that has drawn hundreds of billions of dollars of investment that has created a lot of prosperity through the building of infrastructure.
Good question. Canadians need to be proud of their long history of being developers of natural resources, whether its agriculture, minerals or oil and gas. We need to convince the broad population that we do it responsibly and that we can be world leaders. We need to convince ourselves that it's all in our national interest.
I believe electric cars will start to make a material impact by early next decade, though they won't replace gas tanks completely. I've driven several electric vehicles and they are compelling products with fabulous torque and acceleration. Definitely something to watch in addition to the virtualization trend I talked about in today's column.
Not sure about that. I seem to recall that in very special circumstances (ie crisis) that may be true. I need to read the FTA again. Nevertheless, the real point is that right now we can't supply the east in the event of a crisis, because we don't have the pipeline infrastructure to do so. During the1970s oil crises we had to ship Alberta oil to BC, onto tankers, through the Panama Canal and onto Montreal. Pretty ridiculous.
I agree the visuals are neither appealing nor desirable. This is recognized and the industry is moving toward better practices like phasing out tailings ponds over time and improving processes. However, the reality is that we are exporting 2.5 MMB/d of all oil (and gas) sources at a big discount. We've already made the investment and decision to export. We owe it to ourselves to be realizing top dollar for what we sell to others.
Peter, I moderated a live chat with Jeff Rubin, the former economist with CIBC, last week. While certainly in the past bullish on crude, he now says a retest of recession lows near $40 a barrel is possible, given his expectations of defaults in Europe. Do you think crude could really slip that far given the macroeconomic picture right now?
I'm not as bearish as that. I think you could see $80 and possibly $70 if the global economy weakens significantly. However, the world is still consuming almost 90 million barrels a day, and the marginal cost of production is above $80/B. If we see prices below $80 I don't believe they will sustain for long.
How about natural gas? There's been a bit of a bounce lately off their decade lows. Could this be a signal that natgas is finally starting to turn around?
Yes, I believe natural gas is positioned to bounce back. $2.00 is not a sustainable price; the free market agrees. Rigs are abandoning gas, while consumers are demanding more. The leading indicators are all favorable and the market is sensing it. I think we'll see over $3.00 by winter.
Would that not imply that natgas producer stocks are bargains right now?
With the disclaimer that I don't make stock picks, yes, that logic does follow. Although, selectivity is advised, because there are big differences between natural gas companies. It's somewhat obvious, but worth repeating: Invest in the lowest-cost producers.
Peter, any response to environmental concerns such as this?
I understand the sensitivities. Every society, including our own, is conflicted between balancing energy use, environment, energy security and maintaining prosperity. That's why we need a national discussion. We need to ensure that all infrastructure is developed responsibly and I believe Northern Gateway can be done so.
Good question, though bear in mind that Northern Gateway is an oil pipeline. I think you are referring more to the LNG projects and the natural gas pipelines that will traverse some of the same route as Northern Gateway. I don't see the arb going away. Asia does have a lot of reserve, but will take time to develop. The growth of natural gas demand in Asia is staggering -- growing at 8%+ a year -- and they will need it all plus Canadian supplies too.
Here are two somewhat related questions on the topic of cooperation
Absolutely. I think an energy discussion (all forms of energy) is a great opportunity to bring the country together for the greater good. Ironically, it's Alberta that's leading the charge, while the east seems to harbour some resistance. Yet, I believe it's the east that has the most to benefit.
Yes, I think that argument holds weight. Western Canada's oil and gas industry has over 100 years of experience and regulatory bureaucracy. Because of that we have some of the most stringent environmental rules and regs in the world. We have a lot to offer the world. It's time we started acting like leaders instead of beating ourselves up about how bad we are.
We're almost out of time. One final question, this one from Tony
Fair question. Your comments are why I don't believe electric cars will fully substitute the IC engine. However, electric cars offer a dimension of performance (including high torque and HP) that surpass IC based cars (from my personal experience driving them). Overall though, it's best if society has diversification in energy systems for transportation. So I don't believe we should stick just with petroleum based cars.
Thanks Peter. Any final thoughts for our audience today?
I want to thank everyone for participating. This Internet medium is in the spirit of my first column for The Globe and Mail! I hope we can have further forums like this as it is important to the future of our country. Thanks again!
Thanks Peter - and we look forward to reading future columns on this website. Before we go, just a couple comments our users have left during the chat:
Thanks everybody, and good-bye for now.