In my posts, I try to avoid politics as the last thing the world needs another internet author spouting his opinion to a world that increasingly only looks for conformational pieces to support their own views. But I have been meaning to talk about the Keystone Pipeline controversy at some point, and a post by the author of the NakedCapitalism.com website has stirred me to respond.

In the post, the author seems to have some rather aggressive and agitated comments directed towards Canada.

(Post intermission #1: Canadians’ flattering image of themselves as unfailingly reticent and polite is wearing a bit thin lately. The actions above are not those of a reserved and self-effacing people but an aggrandized and obnoxious one. Please own your new identity and stop insulting our intelligence, thanks.)

http://themacrotourist.com/images/Azure/SorryMay2214.png

The last thing I want to do is insult this author’s intelligence, so I won’t dare suggest that maybe he has mixed up who the world views as an “aggrandized and obnoxious” society.

After we dig past the insults that the author has hurled towards non-Americans we get to his main point that America is being played as chump by Canadians who are attempting to sell them oil.

As a Canadian, I would never dream to tell them Americans how to run their state of affairs. If they don’t want to buy our oil, then we should respect their choice. I sympathize with the author that they should not be subject to lobbying by Canadian (and American) companies that want to build the Keystone Pipeline. Then again, I don’t think they should be subject to most of the lobbying that they experience, but that must be my aggrandized view of myself shining through… Or maybe that is my obnoxious side.

So let’s just agree that if the Americans don’t want Keystone, as Canadians we should respect that choice.

Before I give you my opinion about the wisdom of that decision, let me just say that from a financial point of view I am thrilled that the Americans have headed down this road. Right now, as Canadians we are much too dependant on selling our energy to the American market. The American reluctance to allow Keystone is forcing us to diversify our customer base and in the long run, this is a huge positive for Canada. North American oil (and especially Alberta oil) sells at a massive discount to world prices and the sooner we stop giving away that spread, the better.

So I apologize for not sticking to the NakedCapitalism author’s view of Canadians as trying to force Keystone down their throat, but I want to thank the Americans for compelling us to find some new customers. In fact I believe it is Canada’s long term interest to immediately abandon all attempts to persuade the Americans to build Keystone and instead put that focus on getting the oil to customers who want it.

But if I may humbly suggest to my American friends, I am not sure that your decision is going to accomplish what is intended.

I believe the main argument against the Keystone Pipeline is that it speeds up the environmental damage from burning fossil fuels.

It will maybe surprise the reader that as an obnoxious and aggrandizing Canadian, I still firmly believe that global warming is real. Although the author of NakedCapitalism probably believes us all to be climate science denying cretins, Canadians are actually more likely to believe in Global Warming than either Americans or the British (according to an Angus Reid poll in 2013):

In the online survey of representative national samples, 58 per cent of Canadians believe that global warming is a fact and is mostly caused by emissions from vehicles and industrial facilities. The proportion of respondents who feel the same way is considerably lower in the United States (47%) and Britain (45%).

While three-in-five Canadians (60%) support protecting the environment, even at the risk of hampering economic growth, only 49 per cent of respondents in the United States—and 44 per cent in Britain—concur.

I am very torn about Canada’s reliance on energy exports. As a Canadian I am even more upset by the fact that the mining of the oil sands destroys the land, leaving a barren wasteland. I expect our government to hold the oil sands companies responsible for returning the environment as close as possible back to its original state once mining has finished.

http://themacrotourist.com/images/Azure/TarsandsMay2214.pngThe wastelands of Alberta oilsands</a> </div>

But this is where I disagree with NakedCapitalism’s author about the best way to go about minimizing the environmental damage to our societies.

If you really want to fix the problem, then the answer is to tax all fossil energy. The only effective way to lower the demand (and use) of fossil fuels is to tax it across the board. Interestingly enough, as Canadians we pay $2 more per gallon for gasoline than our American counterparts. The reason? Taxes.

Do you really think that stopping the Keystone Pipeline is going to slow down the burning of fossil fuels by Americans? Not a chance. On the other hand, the alternative of raising the price of gasoline that Americans pay to Canadian levels will be extremely effective at reducing oil use.

If I had it my way, there would be worldwide tax on all fossil fuels with the proceeds explicitly separated for alternative energy research and development. But instead of proposing that sort of solution, environmentalists have chosen to demonize the Keystone Pipeline.

The Keystone Pipeline sure sounds scary, right? In fact our favourite NakedCapitalism author cites a quote calling it a “a death-funnel down the spine of the United States. ” Geez… that’s frickin’ frightening. That Keystone must be really unique. It must be completely game changing in terms of the pipeline landscape…

http://themacrotourist.com/images/Azure/KeystoneMay2214.png

Not only that, the Keystone must be really dangerous. After all, pipelines carry fuel which could spill into the environment. But ask yourself, if the Keystone does not go ahead, what do you think is going to happen?

Well, unless there is a change in the demand for fuel (most easily accomplished through the raising of taxes on fuel), then most likely two things will happen. The first is that the existing pipeline infrastructure will continue to be used. Given that this pipeline infrastructure is aging, the status quo actually has a higher chance of leaking than if you built Keystone. Wait you might say, that’s a specious argument. Keystone is not only upgrading some existing pipelines but also expanding the capacity. You are bang on correct. But ask yourself this; if the demand is not going to shrink, and there is limited pipeline capacity, then what is going to happen? The answer is that Warren Buffet’s favourite utility is going to transport it. That’s right – they are going to ship it by rail. And as we have already experienced, shipping energy by rail is infinitely more dangerous to both human beings and the environment than pipelines.

So by stopping the Keystone, are the environmentalists actually going to accomplish any of their goals? Is going after this one project not similar to declaring a war on drugs and then targeting one big dealer? Even if you stop this dealer, isn’t another one just going to spring up? Wouldn’t it make more sense to try to curtail the demand instead of the supply?

If the American people don’t agree with this logic, then Canadians should by all means respect their decision and move on. As Canadians, this situation reminds me of a guy who gets dumped by a manipulative girlfriend yet keeps chasing her and letting her use him. We would be much better trying to find a new partner.

I think that Canadians are being unfairly targeted as a scapegoat. I respect the goals of the environmentalists that are trying to stop climate change, but I think that stopping Keystone is going to accomplish jack shit.

I know that we as Canadians do a lot of things wrong. There is so much that we can do better.

But to stoop to tarnishing us all as a bunch of self aggrandizing idiots just demonstrates the weakness of the author’s argument.

Unlike the NakedCapitalism.com’s author, I understand that you cannot convict a society based on the actions of a handful of companies.

I fully respect my American friends and have no desire but to wish them all the good fortune in the world. They of course should not be coerced to build the Keystone pipeline if they don’t want it. And in fact, I believe that this episode has done Canada a huge favour.

At the risk of being accused of trying to perpetuate NakedCapitalism’s opinion of “Canadians’ flattering image of themselves as unfailingly reticent and polite,” I apologize if we offended you trying to sell you oil. [ Ed note: if you want to read a great report about the whole Keystone controversy, I recommend spending the time to read

Bloomberg’s account of the affair. ]


Loving the long dated crude

So what does this mean for the price of oil? After all, the last thing I want to do is for this letter to become a collection of thoughts about “what should be” instead of “what is.” Too many things in this world could be better. As traders our job is not to drone on about the solutions, but rather to cut down to reality and trade accordingly.

I think that the chances of Keystone being built are quite low. There is simply too much hair on it.

I also believe that the chances of the environmentalists being able to garner support for a tax fossil energy across the board solution is even lower than the chances Keystone is built.

Therefore the United States will slowly cut themselves off from Canadian oil, all the while doing nothing to change the behaviour of their consumers.

Right now this seems like a great solution for America. They are awash in a sea of oil from their different shale oil discoveries. Energy self sufficiency is just around the corner. Cutting off Canadian oil makes it appear like the environmentalists are actually accomplishing something, but the price for the much needed changes does not need to be actually paid.

Over the last half dozen years, the spread between North American oil and world wide oil has steadily grown. It used to be that WTI traded at a premium to Brent, but that all changed with the discovery of shale oil.

Now there is a persistent discount. It is even worse for the Canadian oil sands oil that without Keystone is trapped up in Alberta – forced to be shipped by rail.

Here is a chart of the three different oil prices since 2008:

http://themacrotourist.com/images/Azure/OILMay2314.pngThree different oil prices – Brent, WTI and Canada</a> </div>

This discount has been a huge relative savings for the American and Canadian consumers. They have not been paying world prices for oil due to structural inefficiencies in the pipeline infrastructure.

Although that seems like a great win, as America turns its back on Canada, this spread will narrow. Canada will be forced to come up with other solutions to sell their oil in the world market. This will at first require massive investment in infrastructure. But over the long run, it will narrow (and maybe even eliminate) this gap between North American oil and world oil.

Therefore the decision to not allow Keystone will over time, be bullish for WTI prices.

I also worry that America is being over confident about shale oil’s prospects. There is still some debate on the size of their resources.

Have a look at this chart of the production of the various shale plays:

http://themacrotourist.com/images/Azure/ShaleMay2314.pngShale oil production</a> </div>

It is by no means assured that the production will be as large as forecast. In fact, recently the US officials were forced to cut the estimates of recoverable Monterey Shale oil by 96%.

If America has misjudged the oil resources in the ground, and then encourages Canada to find other partners, she very well might end up paying way more oil than ever imagined.

All of these policies make me even more bullish on long term crude contracts.

Currently the forward crude oil curve is trading at a steep backwardation. The price for oil in the future is trading at a massive discount to spot:

http://themacrotourist.com/images/Azure/CrudeCurveMay2314.pngWTI crude oil curve</a> </div>

I know all the reasons why oil has to go down in price. I have to read about them every day in my research feed.

But I am willing to take the other side of the trade.

Market participants are overly confident about North American oil supplies. America is pursuing policies that will cause the discount of this oil to world wide price to narrow (making the price rise on a relative basis). And finally, although no one believes inflation will ever again rise, I am willing to take the other side of that bet.

Buying forward contracts at steep discounts to spot is terrific risk reward long. If things didn’t look bleak for oil, then you wouldn’t be given this opportunity. But ask yourself, what are the chances that everything is going to go right? And even if it does, what is my downside? On the other hand, if market participants have misjudged any of these factors, what is the upside? And what if they are wrong about it all?


No, we don’t keeep Moose as pets

This week-end is Memorial day week-end in America. Canada’s May holiday was last week-end when we celebrated Victoria Day (or as we like to call it May 2–4.)

Although my NakedCaptialism author thinks Canadians are self aggrandizing, I think he should have a look at what made our national news:

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I would like to point out that we don’t keep moose as pets and that the fellow was on the way to dropping the moose off at a shelter when he decided to pull over at Tim Hortons for a coffee (taking the moose baby you found on the side of the road into Tim Hortons makes perfect sense to me – you can’t leave him in the car). Also, unfortunately it wasn’t the Tim Hortons in my building. And finally, I don’t know your Brother-in-law’s friend Frank from Saskatoon.

For my American friends – have a great Memorial Day week-end!


Positions

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