Last month, oil prices dropped to under $40 a barrel, a six-year low. For the average consumer, lower oil prices mean lower gas costs.
But not everyone is celebrating.
Canada, home to the third largest source of untapped crude oil, and the United States’ biggest single source of crude imports, is digging itself into a deeper and deeper hole as prices continue to plummet.
The High Cost of Tar Sand Extraction
The problem for Canada is that most of its untapped crude oil is locked up deep beneath the surface in tar sands, a combination of bitumen (a heavy, viscous oil which is then refined into oil), clay, sand and water. While about 45 percent of production comes from traditional strip mining, the remainder has to be extracted through innovative (and expensive) methods.
Even when oil can be extracted by traditional methods, Canada still has one of the highest extraction costs in the world because the oil must be separated from deposits of sand. The difficulty in separating the oil also requires more energy than traditional extraction, causing the production of three to four times more carbon emissions per barrel than conventional oil and gas.
Prices are also high because of high transportation costs from the remote forests of Alberta, where the tar sands are located. The Keystone XL pipeline would alleviate some of these costs. However close to seven years after the initial application, President Obama still has not approved the application for the pipeline project, largely due to environmental concerns. Canada’s Prime Minister Stephen Harper stated that he is not hopeful that it will be approved, at least by the current administration.
The Impact on Canada
The steady decline in oil prices means operators can no longer cover the cost of extracting the bitumen. In order to break even, estimates are that oil must be traded at around $44 a barrel. To generate long-term positive cash flows, oil must trade at closer to $50 a barrel. This has caused developers to stop new projects and halt expansion. It has also led to some smaller players seeking protection from creditors.
But it has not stopped most Canadian oil companies from continuing to produce – even at a loss. Taking the view that the market will rebalance over time, the companies see them-
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