Author Daniel Yergin in Washington, D.C., on October 7, 2014. (Stephen Voss)

by Brian Milner | The Globe and Mail

Canada has staked its future on the oil sands. In November, Report on Business magazine together with Thomson Reuters examine what that means both at home and abroad. Read more from the issue at tgam.ca/oil.

The global oil market is notable these days for slower demand, serious oversupply and falling prices, and the forecast is for more of the same storm clouds next year as well. Leaving aside the spreading gloom over Europe, and China’s inevitable economic slowdown, the main cause of this sharp reversal is a remarkable surge in U.S. production that has turned the energy market on its ear and threatens the feasibility of high-cost projects still on the drawing boards. It is, in fact, nothing less than a revolution in the making whose impact will reverberate through the market for years, argues Daniel Yergin, 67, one of the world’s leading authorities when it comes to global energy policies, economics and security.

Are weaker oil prices here for a while?

Nothing demonstrates that more than having all these global crises–Russia-Ukraine, the Middle East–yet the oil price isn’t disrupted at all. Right now, it’s the power of supply and demand, the really rapid buildup of U.S. supply, a weak European economy and [the slowdown in] China’s economy. I’ll let the numbers speak for themselves. U.S. oil production is up over 70 per cent since 2008 and Canadian oil sands production has increased substantially, too. So it’s really been [supply] growth in North America.

At what point do falling prices begin affecting the economies of producers like Canada?

Obviously, the Canadian economy is directly and indirectly sensitive to what happens to energy prices. The effect would be felt not just in Alberta, but across the country.

Does this have the potential to derail big energy projects?

There have been a lot of discussions about what point you start to see an impact. At these price levels, you will see people slow down their investment. They’re going to be more cautious. Independents will be concerned about cash flow. So I think we will see a slowing of activity. And on the big projects, either they will be slowed down or postponed. Other big, capital-intensive projects that are already launched will go forward.

Wouldn’t it make financial sense to pull the plug?

You don’t stop when you’re in the middle of the highway.

How does the sudden rise of the U.S. as an oil-producing force factor into this picture?The U.S. production has continued to outpace many expectations. Initially, people in other parts of the world did not take it very seriously or said this is just a bubble. Well, it’s not a bubble. It’s really a kind of revolution in oil and gas production. If it slows down [because falling prices curtail investment], you don’t have the same kind of growth and the market gets back in more balance. But right now, there’s a lot of oil around. The U.S. in 2005 was importing about 60 per cent of its oil. Now it’s down to about 30 per cent.

Is that domestic glut the reason you recommend lifting U.S. curbs on crude exports?The United States exports a lot of oil products. But for reasons that are anchored in history, it’s forbidden, for the most part, to export crude oil, with a few exceptions, such as Canada. As a result, you have a mismatch between the type of new oil that’s being produced and the refineries. That is leading to this [market] discount that we’re seeing for U.S. oil and the discount for Canadian oil.

A lot of this new U.S. oil is not well suited for the refineries, which were rebuilt to deal with things like Canadian oil sands. If that oil was exported and the U.S. was back in balance to the global market, that would be good not only for U.S. producers but for Canada, because it would lower this discount to world prices.

What would be the effect on OPEC and global oil politics?

People still talk about OPEC. But it’s really the market. It’s global supply and demand. The impact of this North American renaissance will be felt more in the global marketplace. Right now, the U.S. is actually the largest exporter of oil products [such as diesel], on a gross basis.

What’s your outlook for the oil sands?

We still expect it to continue to grow. But clearly, the Keystone situation is unfortunate. The United States has 182,000 miles of oil pipeline and the part of Keystone that has not been built would extend that by one-half of 1 per cent.

This holdup has occurred without really understanding the impact on Canada, Canada’s attitudes toward the United States and the impact on the whole relationship. It’s very unfortunate that this has gone on and on and has got trapped in the domestic political battle in the United States, when the basic issue is that North America needs its infrastructure to catch up with production, whether it be Canadian oil sands or Bakken crude. The geography of energy has changed in North America, and we need a pipeline system that is responsive to that.

What will the energy sector look like in a couple of decades?Obviously, renewables are going to grow in absolute terms and in terms of market share in some countries. But overall on a global basis, the large part of growth in the emerging markets will come from conventional energy resources. But coal is going to grow. In the 2030s, we’ll be in an unusual situation, in which there won’t be a dominant fuel. There will be a kind of horse race between natural gas, oil and coal. But at this point, I would expect gas to pull out to the front toward the end of the 2030s.