Saturday, August 1, 2009

Of Oil Sands and Saudi Bogeymen

Kathleen Parker has a somewhat nonsensical column in today’s Washington Post. As best as I can tell, Ms. Parker believes that Waxman-Markey isn’t going to do anything to lower crude oil imports; by doing nothing (that is leaving the status quo as it is) it makes us less secure; and that any reduction in crude imports will be due to George W. Bush. It is mostly drivel.

Parker does touch on oil sands as an alternative source of oil and seems to suggest that if we erect barriers to oil importation, driving up the domestic price of oil, oil sands would make a good substitute and we could get out from the thumb of those wily Saudis.

The biggest problem with oil sands is their production cost. Whereas the lifting cost for a barrel of oil produced in Canada was about $10.00 in 2007, the cost of extracting a barrel of oil from the oil sand muck is about $28.00. So, when crude futures trade at around $35.00/bbl, as they did a few months ago, oil sand production costs eat up 80% of the value of the barrel. Even when oil is trading near $70/bbl, as it is now, production consume 40% of the value of the barrel. In comparison, at the $35/bbl mark, the production cost for a barrel of Canadian crude accounts for just 28% of the barrel’s value. And $10/bbl lift cost is at the high end of the spectrum for per barrel lift costs.

Finally, estimates produced by CAPP when crude was trading between $70 and $145/bbl pointed to a Canadian oil sands production capacity in 2020 of about 3 million barrels per day. After significant cuts in capital outlays following the late 2008 collapse in world oil prices, these targets are in serious doubt, though the EIA believes that Canada may produce 4 million barrels per day by 2030. By comparison, the United States produced over 5 million barrels per day in 2007 and consumed more than 20 million barrels per day.

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