What do you get when you take the oil production capacity of Saudi Arabia and put it in the middle of the US, the world’s largest economy? An economic engine that will drive domestic growth in the US and Canada for years to come.
The situation is, in fact, already a reality: the US overtook Saudi Arabia and Russia as the world’s largest producer of oil and natural gas this past year (see Fig. 1). When Canada’s oil and natural gas production is added to that of the US, North America is by far the clear global leader in energy production.
The US produced the equivalent of about 12.3 million barrels a day of oil, natural gas liquids and related fuels at the end of 2013, compared to a daily output of 11.6 million barrels and 10.5 million barrels from Saudi Arabia and Russia respectively, according to the US Energy Information Administration. Canada is the world’s fifth-largest producer, with a daily output of 4.1 million barrels.
US oil production had been in decline for more than 20 years until 2006, when new technologies, such as horizontal multi-frac drilling, unlocked the latent potential of tight shale oil and gas trapped within its sandy deposits.
The last time North American oil flowed to such an extent, crude sold for $28 a barrel, Reagan was still president, and Back to the Future had just
been released
Since that trough, total US oil and liquids production has increased by five million barrels per day to the aforementioned 12.3 million barrels per day at the end of 2013. This is primarily due to three major resource formations being unlocked: Eagle Ford in Texas, the Permian Basin in New Mexico and Texas, and the Bakken Formation in North Dakota and Montana. Canada is also producing much more oil, – 4.1 million barrels per day today – mainly from Alberta’s oil sands and the Bakken Formation in Manitoba and Saskatchewan. The last time North American oil flowed to such a great extent, crude sold for $28 per barrel, Ronald Reagan was still the US President, and the first Back to the Future movie had just been released. In 2006, prior to the unlocking of Eagle Ford, Permian and Bakken, the average price for West Texas Crude Oil was $66 per barrel. In 2014, the price of an equivalent barrel has risen to a range of $80 to $107.
The US’ ascent is starting to create tectonic shifts in terms of trade, money flows and economic growth. Indeed, this remarkable shift in the world’s energy production is translating into a major economic windfall for the US and Canadian economies, and we believe it will continue to do so for many years.
Economic impact
The magnitude of the economic boon from this rise is staggering. Assuming oil prices at $100 per barrel, the increased production in Canada and the US means that as much as $212bn per year, that would otherwise be used to purchase OPEC oil, is now staying in North America and being put to use here.
The gains are, in fact, much larger when we include the virtuous cycle of new high-paying jobs supporting energy transportation and services, and the associated manufacturing renaissance that comes with a highly skilled, well-educated labour force and stable energy prices.
According to the US Bureau of Labor Statistics, 264,000 new jobs have already been created in oil and gas extraction and related industries since 2006. The average salary for these jobs is over $76,000 per year, or an aggregate of $20bn per year. If we assume a simple 2.5 multiplier effect (see Fig. 2), based on a conservative estimate of 60 percent marginal propensity to consume, the energy boom translates into approximately $500bn per year. That’s equivalent to nearly three percent of US GDP. It is clear that North America’s energy sector is partially fuelling the current economic recovery.
We believe this economic windfall is sustainable and that our estimates may be conservative. Indeed, more than $100bn worth of announced or approved infrastructure-related facilities projects in downstream gas, liquefied natural gas (LNG) and chemical plants will be developed in North America over the next five years, according to CIBC Asset Management’s Utilities and Power Senior Sector Specialist Dominique Barker. The economic stimulus from our largest trading partner is good news for Canada in terms of trade, tourism, energy security and growth.
A sustainable outlook
In order to ensure the sustainability of this growth, a responsible approach to the environmental and social impact needs to be adopted by the industry. Carbon footprints, water quality and land use all need to be appropriately balanced with overall economic benefits. Additionally, the quandary of access to market is a concern for Canadian energy producers, as trucking, rail and barging are neither the safest nor most efficient modes of transportation. The latest technologies utilised in pipeline construction and monitoring, such as acoustic detection systems, internal pressure wave based tools, and external cable and optical fibre systems, ensure that pipelines remain the safest and most reliable mode of transporting crude oil. As such, delays in cross border approvals for projects like TransCanada’s Keystone XL pipeline not only negatively impact the economics of crude transportation for Canadian producers, but also raise the risk of accidents and spills along already congested rail networks.
The US Energy Information Agency is calling for Americans to consume roughly 19 million barrels a day of oil in 2015. So, despite the US’ rapid growth in energy production, there are still no forecasts that predict complete energy self-sufficiency in the foreseeable future. We believe that, in the long run, energy self-sufficiency will become more viable in North America, but only if Canada’s oil sands and unconventional resources are exploited. Growing North American production is displacing foreign barrels; however, it is extremely unlikely that all sea-borne foreign barrels will entirely be displaced, due to the benefits of diversity of supply as well as foreign ownership of North American refineries.
Luckily for Canada, the US spent the better part of the past decade pouring billions of dollars and resources into reconfiguring its vast network of refineries on the Gulf Coast to accept the heavier type of crude produced from Canadian oil sands. These refineries convert crude oil into different types of fuel or end products such as motor fuel, aircraft fuel, heating oil, asphalt and petroleum coke. The majority of this monumental spending occurred between 2006 and 2011, prior to the recognition of the abundance of light oil coming from new US shale formations. As such, there remains a great deal of demand for heavy Canadian crude by US refiners, especially as heavy oil supply from Mexico and Venezuela is falling due to natural declines in those fields.
Today, the make-up of Canada’s crude oil production is almost evenly split between light oil and heavy oil. However, over the next decade, the vast majority of Canadian production growth is predicted to come from heavy oil regions like the oil sands. According to forecasts compiled by CIBC Global Asset Management’s Energy Specialist Brian See, by 2020 as much as two thirds of Canada’s production will consist of heavier crude slates, and thus the need to ensure end market customers is imperative for Canadian producers’ economic success.
Canada’s stable political climate is analogous to its highly predictable oil sands assets found in the foothills of Alberta. Unlike a well drilled in one of the US shale formations, which would have a natural decline rate of 30-40 percent, the decline rates of an oil sands mine can be drawn out over many decades without the need for capital being spent to replenish the lost production.
Simply put, there are no other large-scale untapped reservoirs that are located in politically stable countries that are open for trade and commerce, with such a well-educated and highly-skilled labour force. For the US to obtain self-sufficiency, it needs Canada. That’s why we believe Canada’s energy sector has a very bright future indeed.
