Ethical oil and Opec

30 September 2010

Power in global oil markets doesn't rest in Ottawa or Calgary, but in Riyadh and Vienna – the headquarters of Opec

MOST people know what "fair-trade" coffee is and why its supporters say it can help exploited producers of one of the world's crucial commodities. But how about "ethical oil"? It's a concept doing the rounds now in Alberta, thanks to a book with that title by the relentless controversialist, Ezra Levant.

The book is a polemical defence of the oil sands – and an attack on their opponents – that says bitumen from Alberta is the "ethical" alternative to oil sourced from corrupt, repressive, violent, "socialist", "Fascist", or otherwise downright nasty producers elsewhere in the world. Levant reserves particular scorn for Opec and its members.

Americans will fill their cars with a petroleum product tomorrow, runs his argument: would they rather buy this oil from Saudi Arabia, enriching a government that he says represses women and supports terrorists? Or buy it from Canada, which he describes as an open, democratic society where workers' rights are protected and the profits are accounted for transparently?

T Boone Pickens, a tycoon now famous for his campaign to gasify the US transport sector, install wind power across the great plains and deliver energy autonomy to the country, made a similar argument on a visit to Calgary last month. Money the US spends on oil imports, he claimed, was funding the war in Afghanistan. Canadian oil was the exception. Imports from the frozen north are just fine. "Know this," he told his Calgary audience, "we love you!"

These are strange arguments that show little grasp of the global economy, or the way its most important commodity is traded. The riches of Middle Eastern oil producers – always the target of such rhetorical venom – may help fund the Taliban (although tracing such money flows would be difficult). But those exporters have also deployed their wealth to prop up Western financial institutions during the recession.

Moreover, any strategy to reduce US imports of Middle Eastern oil still further (the trend is already under way) could only work incrementally. The oil sands, soon to become the US' largest source of foreign oil, account for only 1.3m barrels a day (b/d) of the country's 11.8m b/d of imports. The Canadian Association of Petroleum Producers says Canadian exports will reach just 2.9m b/d by 2020 – leaving the vast bulk of US imports to be sourced elsewhere.

Oil is also a globally traded commodity and tends, roughly speaking, to follow the laws of supply and demand, so any reduction in US imports from the Middle East would simply make more – and cheaper – Saudi Arabian crude available for the growing oil-consuming economies of Asia.

Such protectionist arguments also ignore another fact: power in global oil markets doesn't rest in Ottawa or Calgary, but in Riyadh and Vienna – the headquarters of Opec. With up to 6m b/d of spare capacity in hand, Opec now holds more sway over the world's economy than it has in years. On its own, Saudi Arabia's spare capacity is three times production from the oil sands of Alberta, where output has grown as quickly – or slowly – as the market will allow.

With a nod from Ali al-Naimi, the Saudi oil minister, Opec could flood the global market with crude supplies, killing the recovery in Alberta's oil sands and reversing the growth in Canada's share of the US market. Indeed, as much as some in Calgary would like to consider the oil sands to be Saudi Arabia's and Venezuela's global rivals, Alberta's oil patch now depends on Opec's management of the oil market as much as Nigeria or Ecuador.

At $75 a barrel, the price Saudi Arabia considers "fair", and which Opec has more or less maintained since late 2008, growth in Canada's bitumen production is viable. A dip in the oil price of just $15/b and investment in new projects starts to look dicey. The big producers – such as Suncor, the oil sands' largest producer – can keep their oil-sands operations running at $35/b. But it is greenfield projects that are crucial to Canada's ambitions to become, in prime minister Stephen Harper's words, an "energy superpower". Those new projects need Opec's visible hand on the market to remain plausible.

This isn't a view that is much acknowledged in Alberta, where the oil sector is preoccupied with a shorter-term fight, against vocal opposition, to persuade the US authorities to approve new import pipelines from the oil sands. But the Canadian oil patch ought to remember its debt to Opec and recognise, as Saudi Arabia does, that if global energy demand grows as the International Energy Agency and other bodies predict (with oil demand reaching 105m b/d by 2030), all sources of oil – as well as coal, gas, uranium and renewables – will eventually be needed.

While the haze of global economic downturn persists, it is hard for some in the rich world, where oil demand may have peaked, to see where this rampant growth will come from. Yet, according to the World Energy Council, a quarter of the world's population still does not have adequate access to energy. Even if China, the world's economic juggernaut, curbs its oil-demand growth as some analysts predict, energy must be spread to help other developing nations draw their people out of poverty.

That puts a different twist on "ethical oil". Despite owning the second-largest reserve of oil in the world, Canada is not yet in a position to send its energy to anyone but the overfed consumers of the US. Even if pipelines open to allow bitumen exports from the oil sands to Asia, those volumes will barely make a dent on supplies to the rest of the world.

Opec in the driving seat

This leaves Opec's members, which control almost 80% of the world's conventional oil reserve – the bulk sitting in countries with established and easy access to both the static markets of the West and dynamic ones everywhere else – in control. Fifty years after its birth, the group's power is as great as ever (see p48).

And the past two years suggest that Opec has learned to wield its influence wisely and benignly. Its price target of $75/b keeps the cash flowing to its members, many of which remain troubled by poverty. But it's also a level that won't cripple the world economy again, as the price spike in 2008 did.

The wider ethical question is whether the world ought to consume oil at all, given the prospects of damaging the climate if we continue to abuse hydrocarbons as we do now. Many environmentalists – such as the Greenpeace activists boarding ships in the Arctic (see p4) – say the world must move beyond petroleum. Some thinkers, such as Peter Tertzakian, author of The End of Energy Obesity and chief economist of Arc Financial, say the petroleum era is in its death throes anyway.

Yet such a debate points to a fundamental division in the world, between the energy-obese nations of the rich West and the energy-hungry majority elsewhere. Oil addiction can damage economies, but oil use can rescue them. Ethical energy is energy that reaches the starving, not the obese. For all Opec's faults, its stewardship of the oil market has restored the conditions necessary for the new investment in energy that the world needs, from wind farms to the oil sands.



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