Jeff Rubin predicts disaster on Canada’s railways

The economist says a lack of pipelines and surplus of oil spells trouble on the rails

by Chris Sorensen

Andrew Tolson

Jeff Rubin, author and former CIBC World Markets chief economist, correctly warned of a big real estate slump in Ontario in the 1990s and soaring oil prices in the 2000s. While his prediction that oil would hit $225 a barrel by 2012 didn’t come to pass, he says his mistake was to underestimate how quickly rising energy prices would put the brakes on economic growth.

Transport infrastructure in North America—mainly pipelines— hasn’t kept pace with the explosion in North American oil production. So you’ve got, in effect, a lot of stranded oil. That’s why, of course, oil is being loaded onto railcars out of the Bakken (in North Dakota)—and we’ve seen the tragic consequences of that in Lac-Mégantic. Meanwhile, there are already three rail terminals being constructed in Western Canada. All together, Canada may go from moving about 200,000 barrels of oil a day by rail to 900,000 barrels of oil, which, incidentally, is more than the Keystone XL pipeline. That’s been the de facto way that the industry has dealt with the pipeline bottleneck. Without rail coming to the rescue, the Bakken wouldn’t be producing 900,000 barrels a day and it wouldn’t be possible to increase production out of the tar sands either.

But what’s going to happen is, one of these days an explosion is going to happen in Chicago or Toronto, which are areas that get lots of oil passing through by rail. The train that blew up in Lac-Mégantic went through Toronto, in fact. When that happens, it will change the whole nature of the equation. The lawsuits are going to dramatically hike the insurance costs for railroads. And when I say we’re going to have other disasters, I’m not making a statement about corporate negligence or malfeasance. I’m merely talking about the laws of probability. Rail is a far more expensive and hazardous way of moving oil than pipelines.

Ottawa and the industry have grossly miscalculated the economics of the oil sands. Western Canadian Select, the price that oil sands producers get, is around $58 a barrel and the costs of new production are anywhere from $70 to $100. To me, that doesn’t sound particularly attractive.

The reality is that nobody likes pipelines in their backyard. When we imported oil, moving it was somebody else’s problem. There are oil spills every day in the Niger Delta, but we don’t care. Out of sight, out of mind. Moving oil around the world is a messy business that we’ve never had to deal with. But now that we are, we don’t like it. We don’t like pipelines so the oil industry has gone for rail, but I suspect we will like rail even less.

As time goes by, I think you’ll find that the Suncors and Canadian Natural Resources of the world will find it more difficult to raise the capital they need to achieve their grandiose production plans. And that’s because their grandiose production plans don’t leave very much profit for shareholders. Now, if they could get Brent prices, which are about $112 a barrel right now, the folks in Fort McMurray would be very happy and Suncor would be trading a lot higher than it is today. But without solving the infrastructure problem, the discount will get worse because more production will pile up. However, I don’t see a huge rush anywhere in North America to have pipelines built. And I think this rail thing is a ticking time bomb that will not only backfire on oil producers, but will really backfire on railways.

As told to Chris Sorensen




Browse

Jeff Rubin predicts disaster on Canada’s railways

  1. More reason to fund development of alternate sources instead of welfare to the oil industry.

    • Hahaha! You so funny make my sides hurt! Thanks you!

      Would you prefer the bird-killing machines, which have become so outrageous that the EPA had to give US companies the legal right to kill bald eagles? Or the solar panel debacle, which is bringing in energy costs of eight times the market? Or how about nuclear?

      My point being, it you have an opinion about this, be a little more specific. I’m a strong fan of nuclear; almost zero-carbon, we have thousands of years supply, and Saskatchewan is full of old phosphate tunnels that are ready for waste storage.

      What’s your pick?

      • Neither

      • My pick is we use fossil fuels with increasing incremental efficiency so that its relative demand stabilizes even declines. If there is an economically viable alternative to this, by all means we should go for it. But as you point out, the wish for it is much greater than the supply of it at the current time. The Fukushima Daiichi accident changed my mind permanently about nuclear which is regrettable but the more you learn of that accident and the certitudes that existed before the obvious miscalculations about its design and operation, you realize those same potentials exist in all human endeavours, but with nuclear those risks reach existential possibilities – not worth it. Some of the solar electric projects that store solar energy using liquid salt, though costly still, sound hopeful and are in actual successful deployment.

        • Good response, thank you. Methane has definitely given us a bit of breathing room and we need to capitalize on that by driving efficiency up. I still like nuclear, particularly thorium, but your point is well-made. Salt does look good, BTW its the same heat exchanger as thorium, just a different heat source.

  2. Alberta bitumen (by definition: asphalt) gets a low price because it is the lowest possible grade of crude (crud). There is no evidence that it can command Brent price regardless of the billions of dollars in pipeline investments being planned. Brent price is simply a pipe dream. Global warming will demand that 2/3 to 3/4 of known fossil fuel reserves be left in the ground. Ignoring that will have dire economic consequences. After coal, bitumen is next off the table. There is no reliable business case here, and touting some idiotic ‘Sophie’s choice’ between pipeline and rail disasters doesn’t fix that. It’s time to move on…to renewables and divest from fossil fuel investments. Past generations climbed higher mountains than this.

    • This is not true. Upgraded bitumen would attract a premium price to Brent if it had seaborne access. Upgraded bitumen when pipeline capacity was available, typically traded at a premium to WTI.

      But the advantage is really to an upgrader+refinery on a seaport at the end or a pipeline carrying diluted bitumen…i.e. Houston, Prince Rupert/Kitimat (if built), Montreal, New Brunswick, where the upgrader wouldn’t face the risk of lack of transport options. Or in Chicago, at a pipeline and railroad hub for the entire US industrial heartland.

      • Even if upgraded bitumen trades equal to WTI or Brent, its not as profitable because the cost of upgrading needs to be accounted for.

  3. Didn’t this guy tell us that our “oil-dependent global civilization is about to get the shock of its life” a few short years ago in “Why Your World is About to Get A Whole Lot Smaller?”
    Maybe someone should call him on his $225 per bbl prediction by 2012 before asking what will happen in 2014.

    • Did you actually read his book? Or did you not even read the article, he does offer an explanation as to why his prediction did not panout.

      • Rubin made a prediction that did not come to pass. As a result, he’s treated as an expert and asked for more predictions. Like Dan Gardner says, “heads I win, tails you forget we had a bet.”

        As for the disclaimer in the article, he failed to see that the high price of energy would slow growth, thus driving down the price of oil. The same thing that happened in the 80s.

  4. Are you freaking kidding me? You’re printing predictions by the author of “Peak Oil”.. which advanced the theory that oil production had peaked? This book was released just as fracking was transforming the industry. This fantasist has no credibility and is another example of why MacLeans is irrelevant to those of us based in reality.

    • Right, the reason he is a former CIBC Chief World Econmist and best selling author is because he is stupid and doesn’t know anything, not smart like you.

    • Ya, PDF’s linked from Dropbox, with Google Analytics tracking codes on it? No thanks, not really looking to download your Malware pal.

      • Too bad for you, you might have learned something.

  5. Remember the best market economists are paid to be 100% memorable and 51% right. Jeff made his name with his big Toronto crash real estate call in 1989. Always controversial on purpose.

    • Has he hit 51% yet? ;-) Just askin’.

  6. Taking the path of least resistance – railways – is truly a bad idea. That’s the paradox of the Ditherer in Chief, while he appeases his green constituency he is increasing our exposure to the very risks they are supposed to be against.

Your email address will not be published. Required fields are marked *