Sailing blindly into a perfect storm

As most readers are aware, the price of oil has fallen precipitously from a high of $147 a barrel in July to about $65 in early November. The pundits will give any number of reasons for the price collapse, including post-Olympic blues in China (leading to less demand), the unexpected rise in the value of the US dollar (making oil more expensive as other currencies depreciate), and Saudi Arabia’s decision to put more crude oil onto the market in September (easing supply constriction).

Whatever the reasons, the fall in the price of oil is a mixed blessing. Probably the most important benefit is that the average price of home heating fuel has fallen from its high of $1.36 per litre in mid-August to about $0.94 per litre in the first week of November (these are Halifax prices from Although this price is still much more than many Atlantic Canadians can afford, the trend is, for the moment at least, downwards.

On the other hand, the price of gasoline is dropping, and with it, a gradual increase in gasoline consumption in several countries, most notably the United States. This calls into question the suggestion that the past year’s high prices led individuals to change their driving habits permanently (often referred to as demand destruction) rather than to take a temporary hiatus until prices became more reasonable (referred to by the International Energy Agency as demand suppression).

In an attempt to stem the unprecedented decline in the price of crude oil, OPEC members agreed to production cuts in October and they may agree to more in late November. If history is any indication, significant reductions are unlikely as many OPEC members often talk about cutting production but few ever follow through. OPEC’s reasoning is that reduced supply will cause the price of oil to increase—those outside of OPEC worry that cutting supply will prolong the economic downturn.

Falling oil prices, coupled with the collapse of world credit markets, are also seen as a disincentive for some energy companies to pursue capital intensive projects, most notably the tar sands in Alberta. Surprisingly perhaps, low oil prices and credit woes are also making renewable energy projects less attractive to investors. Delays in completing energy-related projects, especially those tied to oil production, may mean increased prices and shortages when the world’s economy recovers in a few years time.

Despite significant reductions in energy intensity (amount of energy used per unit of activity) in many countries (most notably the United States over the past 20 years), economic growth is still tied to energy consumption. As the world’s economy improves, demand for oil products can be expected to increase, leading to—you guessed it—higher oil prices.

A number of energy analysts have suggested that the world is entering a period of energy market volatility, with significant swings in the price of oil as supply struggles to keep up with demand. When supply becomes tight, prices will increase and demand will fall, causing prices to decline and demand to rise. Without a major shift away from oil, this cycle is expected to continue and will be exacerbated as oil fields are depleted and new fields are unable to offset both depletion and new demand.

Typically, most governments react to rising energy costs by subsidizing energy consumption. As understandable as they are in helping those on low-income, subsidies often have two shortcomings. First, they are often given to everyone, whether assistance is needed or not, especially if it is seen as a vote-winner; and second, subsidies often remain in lock-step with energy price increases. Unless major efforts are made to reduce energy consumption and replace existing energy sources with ones that are not prone to supply and price volatility, the cost of subsidizing energy consumption will continue to grow.

The present decline in the price of oil gives governments an opportunity to redirect some of their energy subsidies into programs that reduce dependence on oil products. Sadly, despite the volatility of energy prices over the past few years, many jurisdictions still fail to understand that this instability is here to stay and, as a result, policies dealing with energy-intensive activities such as transportation must change to reflect this new reality.

Few Maritime politicians and policymakers seem to have grasped the rapidly changing nature of world energy supplies. For example, earlier this year the Nova Scotia government released its Sustainable Transportation Strategy in which rail, one of the more environmentally benign and energy efficient modes of moving goods and people, is mentioned once. More recently, New Brunswick released its ten-year multimodal transportation strategy, New Brunswick at the Centre, a comprehensive examination of New Brunswick’s transportation options. Although this report is more favourably inclined toward rail (devoting more than a page to the subject), automotive transport retains its high profile with $2.2 billion recommended for the province’s portion of the National Highway System and another $2 billion for rehabilitating its highways—while only $50 million is proposed for upgrading New Brunswick’s rail network.

Where the price of oil is about to go is still anyone’s guess; there is widespread belief that it will remain about where it is now—still at unprecedented levels compared to the 1980s and 1990s, but lower than its recent highs. Last July, in its Medium Term Oil Market Report, the International Energy Agency projected that the oil markets will remain soft until 2011 because of the world’s economic problems. The next decade may well witness a perfect storm in oil prices, driven by a growing world population, declining production, and a lack of new infrastructure.

Jurisdictions that have reduced their dependence on oil and are replacing insecure supplies of oil with other secure energy sources will be prepared for this storm. The question is what actions are being taken now to protect Atlantic Canadians from this storm?

Larry Hughes
Atlantic Construction and Transportation Journal—November 2008