Stagnant economic growth, flagging demand for crude oil, and an increase in alternative supply sources such as US shale gas have led to a growing mismatch between supply and demand in global energy markets. These factors have been accentuated by both geopolitical instability and OPEC’s decision not to cut output, resulting in a free-fall in the price of oil. Prices this week hit a 6-year low and WTI crude closed at USD 44.39 at time of writing (January 28, 2015). Though cheap oil has the potential to fuel greater economic growth in some corners of the world, it could have profoundly destabilizing effects in others. In this five part series, Geopoliticalmonitor.com examines how cheap oil is a threat to certain regimes and economies, even the global order itself. Part two focuses on Canada.

Background

Canada is the world’s 6th-largest oil producer. It is estimated that oil extraction now accounts for about 3% of Canada’s GDP, and crude oil for about 14% of total exports, making it Canada’s single biggest export. Canada sells over 95% of its oil to the United States, which purchases it below the market rate. The vast majority of Canada’s oil comes from the Oil Sands development in northern Alberta. According to the Canadian Association of Petroleum Producers, the Oil Sands alone impacts the jobs of 112,000 individuals across Canada. Alberta’s Oil Sands are the third-largest proven oil reserve in the world. In 2013, Canada produced a total of 3.5 million barrels per day, 3.2 million of which came from western Canada and out of that a total of 1.9 million came from the Oil Sands.

Oil sands are a mixture of sand, water, clay, and bitumen (oil). In order to extract the bitumen (oil), the mixture of sand, water, and clay must be heated and processed. This make extracting the bitumen very energy and capital intensive. As a result, it costs Oil Sands producers more to extract oil than other producers elsewhere who use traditional rigs to pump oil to the surface. This means the break-even cost for Oil Sands producers is much higher. At present, the break-even points for major Canadian Oil Sands producers range from USD 30.30 to USD 65.00. Though still profitable, the fall in oil prices has cut deeply into profit margins for Canadian Oil Sands producers. This has meant that companies will not be able to invest in new capital-intensive projects which are needed if Canada wants to reach its goal of producing 6.4 million barrels per day by 2030.