Urquhart: Bitumen bubble is more bluff than reality

 By Ian Urquhart, Calgary Herald March 26, 2013 11:21 AM

Catchy? You might have to give the phrase “Bitumen bubble” that much.

Illuminating? Hardly. First, it turns the well-accepted idea of an inflationary bubble on its head. Prices fell precipitously when real estate and dot-com bubbles burst. A bursting bitumen bubble presumes the reverse — bitumen prices will rise relative to conventional crude oil.

More importantly, many of the government’s claims about the “bitumen bubble” mislead. The term is a tool used to deflect responsibility for our revenue woes to circumstances beyond the government’s control. That the government’s choices have put us where we are today is a heresy.

In her January address to Albertans, Premier Alison Redford claimed that historically, the price gap between Alberta and Texas oil only had been “a few dollars.” Since September 2012, she went on to say, “that gap in the differential has grown considerably and the trend is getting worse for the foreseeable future.”

Finance Minister Doug Horner echoed this message in his March 7 budget. The price gap between Alberta bitumen and West Texas Intermediate had “widened.” He told listeners to CBC Calgary that, according to his projections, Alberta wouldn’t “get back to the differential of January 2012 at any point in the next three years.”

Most of these claims about the bitumen bubble are fiction. The historical data tell a very different story than Alberta’s premier and finance minister do about the differential between bitumen and West Texas Intermediate. Since 1997, when the government chose to make bitumen prices the basis for the oilsands royalty system, there always has been a significant gap between bitumen and conventional oil prices. It’s always been more than “a few dollars.”

Look at what the Alberta Royalty Review Panel reported in 2007. Between 1997 and 2007, bitumen prices tended to be approximately 45 per cent lower than West Texas Intermediate prices. Or, look at what industry said. The Canadian Association of Petroleum Producers told the U.S. government in 2008 that, between 2003 and 2007, the annual average bitumen price was only 44 per cent of the West Texas Intermediate price.

As the 2005 to 2012 price data illustrate, the West Texas Intermediate/bitumen price gap bemoaned by government — while still significant — has been less over the past five years than it was during the periods described by CAPP and the Royalty Review Panel. From 2008 to 2012, bitumen sold for roughly 80 per cent, not 55 per cent, of the West Texas Intermediate price. If the premier is right that the foreseeable future will be worse, then such a future may look much like the pre-2008 past.

None of this critique claims the fictions the premier and finance minister have told Albertans don’t have political value. They do. Left unexamined, they’ve helped the government try to avoid responsibility for choosing a revenue path (increasing reliance on bitumen royalties) that has led us to today’s revenue problem.

“No one,” the premier said in one media interview, saw the price gap widening as quickly and by as much as it did in 2012. In other words, don’t blame my government for a multibillion dollar shortfall.

The government’s story about its bitumen bubble also has value when it comes to the campaign to build political support for the Keystone XL pipeline, or any other way to get more Alberta bitumen to heavy oil refineries. Better market access next year or the year after, so the argument goes, will boost bitumen prices.

Maybe it’s in the genes of those of us who call “Next Year Country” home to believe this. We might want to look at what next year may bring more cautiously.

What, for example, will the death of Venezuelan President Hugo Chavez and the results of the April 14 election to replace him mean for Venezuela’s oil producing future? What strategy will post-Chavez Venezuela follow to exploit the extra-heavy oil resources that have catapulted it over Saudi Arabia to first place in the proven oil reserves ranking (296.5 billion barrels)?

Will Chavez’s successor follow his predecessor’s socialist approach to the petroleum sector — an approach that hurt production and exports? Or will he try to address Venezuela’s domestic troubles by warming to the multinationals as Venezuela did in the early 1990s and/or pursuing increased Venezuelan heavy oil access to the same U.S. Gulf Coast refineries Alberta hopes will be a destination for our bitumen (these refineries were designed to process Venezuelan heavy oil).

Some version of the latter path would tend to support the pattern of the past 15 years — a glut of heavy oil relative to refining capacity. This would not be good for bitumen prices.

This possibility underlines what we certainly should know by now. Uncertainty rules petroleum markets and it’s long past time we opted for a more sustainable, predictable revenue mix. The following advice rings true: “The first challenge will be building a more predictable, sustainable revenue base to support ongoing programs.” That advice comes from former finance minister Ron Liepert in his 2012 budget speech. What Albertans should be concerned about in 2013 is the likelihood that his statement, like Alberta’s bitumen price history, is one the current government plans to deny.

Ian Urquhart is an associate professor in the department of political science at the University of Alberta

© Copyright (c) The Calgary Herald