An Oil Shock Stockpile
Is it time for Canada to adopt a U.S.-style emergency petroleum reserve?
“Costs are building more pipeline capacity or the costs of storing crude in Eastern Canada,” Doucet says. “For the benefits, you would have to figure out directly or indirectly what is the probability of interruption; the probability of the supply not coming in from imports.”
World Oil Supply Disruptions
Since 1973, the largest oil disruption occurred at the time of the 1978/79 Iranian revolution. This resulted in a supply shortfall of approximately 5.6 millions of barrels per day for a period of 6 months.
As his summer project, Doucet and one of his students did a “back-of-the-envelope” type of calculation to see under what circumstances an SPR would be justified. The costs of storing 90 days worth of imports for Eastern Canada would be the cost of the oil, which would be roughly 61 million barrels, and the expense of the storage facilities. They calculated four different scenarios based on costs of storage facilities ranging from $3.50 per barrel to $27.30 per barrel and oil prices from $50 to $200. The model yielded estimates of between $3 billion to around $14 billion. The cost of pipelines from Alberta to Quebec – including the cost of a Sarnia-Montreal reversal suggested by Laxer – was around $5.1 billion.
“If the interruption was to last one week, the probability would have to be very high to justify those costs based on the value that would be lost to eastern consumers from an interruption of supply.”
Another set of calculations, based on a scenario of $200-a-barrel oil thought by some to be possible last summer, showed that in order for the costs of a Canadian SPR to be justified, a 10-day supply disruption would need to be virtually guaranteed within a given year while a 20-day disruption would need about an 80 per cent chance of happening.
A trans-Canada oil pipeline might seem like an attractive alternative to an SPR since it would have myriad other benefits to offset the costs. However, Doucet warns that as a public policy move, this option is fraught with problems and would essentially result in a public subsidy of oil for the East – evoking memories of 1970s and ’80s national policies that provoked those angry bumper stickers.
“To date, pipelines have been built by pipeline firms based on supply and demand (that was) based on producer’s and buyer’s shared interest,” says Doucet. “If we were thinking about building a pipeline from Alberta to Eastern Canada, we would have to think about what the shared interests are there and if there isn’t a sufficiently large commercial interest for that – say more people want to build a pipeline to B.C. – how much would the government have to pay?”
In light of a government interest in building this pipeline, companies would be tempted to say it’s not worth very much to them and the government would end up paying even more, he says.
“I would be happiest if it was commercially determined rather than policy determined because if company X feels that it is in their interest to deal with producers and shippers and so on to build more pipeline capacity, then that’s great. Let them do that. As my thinking about this problem suggests to me at least at this point, I don’t think that there is justification from a government policy to do this or to subsidize this.”
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