Jeff Rubin puzzles me


I don’t understand this at all. As far as I can make out, this is Jeff Rubin‘s argument:

  1. Refineries’ margins are paper-thin, and have been so for decades; that’s why North American oil companies stopped building them long ago and have been shutting them down. This is true.
  2. The West Texas Intermediate (WTI) crude oil price set in Cushing, Oklahoma is currently trading at a significant discount from the Brent price set in the North Sea and which is used as the reference price everywhere where supplies are available by tanker, such as Eastern Canada. This is also true.
  3. Refineries buying WTI oil are more profitable than those buying Brent oil. Market pressures being what they are in the market for gasoline, this is also true.

From this, Rubin concludes that the path to prosperity is for Canadians to get in on the business of refining WTI-priced oil – namely, the oil produced in Canada.

This makes no sense to me:

  1. If refining WTI-priced crude was the path to long-term prosperity, oil companies would be building refineries without any encouragement from Ottawa (or Washington, come to that).
  2. The WTI-Brent spread opened up sometime around January 2011. The economics of refining have been dodgy for decades.
  3. The WTI-Brent spread is an opportunity for arbitrage: buying in the low-price market and selling in the high-price market. Ordinarily, arbitrage is a cheap and riskless way of making money. As long as the price differential exists, demand will increase in the low-price market, and supply will increase in the high-price market. The reason why the Brent-WTI differential has persisted is that it was difficult and costly to buy oil in Cushing and transport it to the Gulf Coast, where the Brent price prevails.
  4. Unsurprisingly, the private sector is falling over itself to take advantage of this arbitrage opportunity. The Seaway pipeline reversal has already begun to ship oil from Cushing to Houston, and the southern part of the Keystone XL project is under way. It makes no sense at all to make policy based on the assumption that the WTI-Brent spread is an immutable constant.
  5. It won’t be long — a few years — before the WTI-Brent spread is arbitraged away, and we’ll revert to a world where refining is everywhere a marginal business with razor-thin margins, and in which oil production is lucrative – which probably explains why the private sector doesn’t see much point in investing in Jeff Rubin’s business plan.

Diverting capital and labour away from a lucrative industry towards a marginal one isn’t creating “value-added.” It’s creating value subtraction.


Jeff Rubin puzzles me

  1. “That would be a win for both the economy and the environment. We don’t
    have to risk the destruction of one of Canada’s – and the world’s – most
    spectacular environments to get full value from our oil sands resource.”

    Surely part of understanding “this” is this[above]. Why risk the destruction of a spectacular environment if we don’t have to?
    .It’s in this sense i understand Rubin’s value added comment. The value added surely must include all the jobs both permenant and othewise that would be created by refineries, not to mention the long term tax base[ must be careful here though if the margins are so slim]. As opposed to much more temporary infusion of labour capital and tax base[locally] from pipleine construction.
    I’m no economist so forgive the assumptions but i do understand the disaster that unfolded in BC for workers and families when timber companies were permitted to no longer bear any responsibility in providing wood to small town mills in BC – great for corporate profit and some share holders no doubt.A disaster for small towns.
    It seems to me that some of the same logic applies here. You seem to making the pure argument for corporate profit and investors. Try to think about the blue collar guy like me once in a while Mr Gordon. Sure the margins may be thinner, but the wider question is just whom is the exploitation of this publicaly owned resource supposed to benefit principally? The working stiff or mainly the investors/share holders? So, a win for the working guy and my kid gets to see the BC coast as it should be. Not a bad trade off.

    • Ah, Mr. k. You are clearly a slave to sentiment. Please reorient yourself
      to a proper Economic Man approach. Think of all the quality Chinese goods
      available to you when you consider how to dispose of the income derived
      from the sale of postcards of pretty scenery.

      • Doh…i wasn’t thinking. And i may[will] need that greeter job once the tories are through “modernizing retirement”.Screw the coast then! Come to think of it you’ll be my competition – Mr leftie rabble rouser :)

  2. All very legit arguments IF the growth in Canadian petroleum production was in fact light sweet crude – equivalent to WTI or Brent.

    But, it’s not. As currently configured, most new production will be bitumen – a much heavier product that requires upgrading – either in AB or on the front end of a refinery.

    Not nearly as many refineries can process bitumen as can process WTI , Brent or other similar crudes. Whole different supply/demand curves and “arbitrage” opportunities as described (not to mention you need a pipeline, and/or shipping/receiving facilities).

    Why is Canada so keen to diversify away from the US? Because it is currently a captive supplier – and hence price taker – take it or leave it.

    It is humorous to see the economists argue the Keystone XL pipeline on both sides of the border:

    The Canadian supporters claim the p/line will result in higher Brent prices if the bitumen reaches the Gulf Coast refineries, so build the XL pipeline.

    The American supporters claim we need cheap Canadian crude to make our Gulf Coast refineries profitable, so build the XL pipeline.

    Both can’t be right.

    • As an example of difference in pricing depending upon product, a recent piece in the Financial Post:

      Western Canadian Select, the key benchmark for Canadian medium and heavy oil, is trading near $82 this week, compared to US$95 for West Texas Intermediate, the price gauge for lighter U.S. crude. The $13 differential is narrower than the historical average of between $22 and $25 and much smaller than the north-of-$30 spread that was reached earlier this year.

      Canadian synthetic — a partially upgraded bitumen product — is trading at US$102, a premium to WTI, which is normal for this type of crude.

      If you ship dilbit (diluted bitumen) instead of the WCS blend, or as some companies are now doing, undiluted bitumen by railcar, you may see further significant discounts. WCS is explained here:

      The O&G industry is very fluid, and with changing markets, bottlenecks, and opposition to new pipelines and/or tanker traffic – expect to see a lot of creative thinking and differing business plans especially with planned production growing so rapidly – which may indeed now include upgraders and/or new refineries in places previously unexpected, against “conventional” thinking (btw not so long ago, Irving was planning a new refinery in St John’s NB, and I think someone was planning one near Edmonton, – so it’s not so outlandish of an idea )