Six things to know about oil: U of T geologist explains pricing, pipelines, products

February 5, 2016 by Noreen Ahmed-Ullah - U of T News

Oil prices are dropping, oil companies are reporting losses and Prime Minister Justin Trudeau is vowing to be a responsible mediator on pipeline issues.

U of T News asked Professor Andrew Miall of earth science for a primer on oil — from how it’s priced to how it’s transported and used. “

Here are the six things Miall says everyone needs to know about oil:

One word explains why the price of oil has dropped —Oversupply

There’s more oil on the market right now than we actually need. Up until the 1970s, oil prices were very stable and quite low — in the range of $10 to $15 a barrel. The oil markets back then were completely dominated by large oil companies like Exxon, Shell, British Petroleum, Chevron. Then in 1973-1974, there was the Yom Kippur war in the Middle East between Israel and its Arab neighbours. The United States offered unquestioning support and assistance to Israel, making the Middle Eastern countries very angry and the Organization of Petroleum Exporting Countries (OPEC) members decided to limit supply to the West to seek revenge. The price shot up. It was a limited supply, and in the United States, gas stations literally ran out of oil. The oil market has never been the same since.

OPEC has managed to control supply since then, but their power over the markets has become diminished in recent years largely because of the appearance of a large supply from other areas. The North Sea, for example, became a big player in the 1980s and 1990s. Russia also became a big supplier. In recent years, the United States has become one of the world’s leading oil producers after many years of being considered to have exhausted all its oil fields. This is because of new technologies that can liberate oil from very unpromising formations, known as fracking.

So the United States has become one of the largest producers of oil, and OPEC countries, Saudi Arabia in particular, have been very concerned because they’ve seen not only the price dropping, but realize they could lose their market share. So they made a strategic decision to not reduce their own output, which meant the oversupply increased dramatically. When you have a massive oversupply of any commodity on the market, the price will drop. We’ve had a steady drop in price from a high of about $140 a barrel in June 2008, to now around the $30 range.

Barrels are no longer a thing

The “barrel” is used as a convenient measure because in the old days that’s really how oil was transported. The actual calculation is 1 barrel equals 44 Imperial gallons (in the UK), 53 U.S. gallons, or 200 L.

Crude oil and gasoline are not the same

Crude oil comes out of the ground and varies tremendously in viscosity. It can be a light liquid or it can be a much thicker liquid, so thick that it doesn’t flow off the rocks at all. That’s what the oil sands are. The alternative name for oil sands is tar sands because it just sticks to the sand. That’s why it needs these industrial processes to release the oil from the sand. Gasoline refers to the light, low viscosity oil that is a product of refining that is used as a fuel for motorcars. Fossil fuels is a general term for oil, natural gas and coal. Fossil fuels are products of decay of organic material in sedimentary rocks over a long geologic time period. They provide 80 to 85 per cent of the world’s energy needs. Globally we use 90 million barrels of oil every day. That’s a heck of a lot of energy.

A drop in the price of oil does not mean gas prices go down

The gasoline price is going down but it is not going down as much as people would like. It has a lot to do with the costs of refining, transporting and marketing, which has not changed. A lot of what’s done in the industry depends on imports from the United States, which of course has to be paid for in US dollars. That means they’re more expensive. So we cannot expect the price of gasoline at the pump to fully reflect the changing price of crude oil on the world market. It’s never going to do that exactly.

Pipelines are controversial but mostly safe

For a very long time, Canada was providing a very large proportion of the imported oil that the United States was using. Around the 1970s, the United States did not produce enough oil domestically to satisfy its own needs. So it started to import it. Canada provided about a quarter of the oil that the United States was importing. The North American oil for a very long time worked as if it was a seamless continental industry, with production, refinery, pipeline and delivery all managed as if the Canada-U.S. border did not exist.

For example, we’ve long been exporting oil and natural gas from Alberta to the United States through pipelines across the border in the West, from Alberta to Montana for example. The East Coast oil from Hibernia off Newfoundland is largely exported to eastern United States for refining there, and then re-imported back into Canada in the form of usable domestic refined products like gasoline. So there’s a tremendous amount of cross border trade that’s been going on for a long time. It was considered a quite natural proposal to build a pipeline from Alberta into the United States for the delivery of crude oil from the oil sands to refineries in Oklahoma.

Oil pumping station
Trans Canada Keystone Oil Pipeline. Photo: shannonpatrick17 (CC BY 2.0)

That was the origin of the Keystone Pipeline proposal. But this proposal came at a time when there was heightened concern about use of fossil fuels and its effect on greenhouse gas emissions. Environmental concerns began to affect the progress of the continental oil industry. Keystone became a standard bearer for environmentalists in their determination to slow down if not end the oil industry completely in the interest of reducing greenhouse gas emissions.

There’s something like 100,000 km worth of pipelines, crisscrossing Canada right now, carrying all kinds of oils and fuels. There are a number of big pipeline proposals on the table for Canada for a few years now. Besides Keystone, there’s also the Northern Gateway pipeline proposal to deliver oil from Alberta to Kitimat on the west coast of British Columbia. There are several others. Some are not receiving final approval because of Aboriginal concerns, environmental concerns and concerns about increased tanker traffic along the British Columbia coastline.

The last project that looked like it would have the least problems was the Canada East proposal, which was designed to convert an existing pipeline from Alberta to Ontario. It’s an entirely Canadian route, to convert it from gas to oil and to tie it into an existing pipeline that crosses part of Ontario, and build a new pipeline through Quebec that would then extend that line to St. John, New Brunswick. Montreal mayor Denis Coderre has legitimate concerns about pipeline leaks, about pollution of groundwater. By and large pipelines are extremely safe. The alternative is transport by rail and you only have to say words Lac-Mégantic to know what transporting oil by rail can lead to.

Fossil fuels are everywhere

There is a very strong concern about climate change that fossil fuels are one of the major contributors to greenhouse gas emissions, and therefore we should start to transition away from the use of fossil fuels to other sources of energy.

One of the things that I think is not fully understood in Canada — not only is the oil and gas industry a very important part of our economy in terms of jobs and earnings, it also provides this essential part of the energy supply that we cannot live without. Right now there are no alternatives to the use of oil and natural gas on a large scale. Things like air transport. Oil from the ground is refined for lubricating oil, grease. It’s not widely understood that virtually all of our synthetic materials — plastics, resins, synthetic material used in furniture and clothing — they all come from petroleum. These are what are called petrochemical products.

The plastics industry would not exist without petroleum. So the idea that we can shut down this fossil fuel industry and replace it with wind power, solar panels and biofuels is not yet possible. It’s much too early to be talking about shutting down the fossil fuel industry. We simply do not have the alternative technology in place yet to allow us to do that. This means the oil industry needs its infrastructure. It desperately needs these pipelines.

The new Trudeau government has to find a way to make this possible by working hard to develop what Justin Trudeau has called the social license — the general widespread public acceptance of the need for this pipeline. He has to satisfy the public that the legitimate environmental concerns are being taken care of, that aboriginal rights are respected, that procedures are in place to properly manage pipeline breaks, and that companies are behaving responsibly.

Until all of that is done, then we will not be able to build any major pipeline. They are essential to the further progress of the Canadian economy. I don’t think that’s overstating it, especially because at the present time, there really isn’t any reasonable alternative.