This is an interesting article send over to us from Chris Temple. If the facts in the post are true it is a scary sign for the overall Canadian economy. We have seen some recent weak news out of Canada and lower interest rates this year. Hopefully we (Canada) can turn it around.

This post was originally posted on OilPro.com – click here to check out the site.

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Western Canadian Select (WCS) at Hardisty closed today below $30. If the price of Dilbit, produced from Oil Sands, is presumed to be the same as WCS, and Dilbit is Canadian Bitumen cut with a half-a-barrel of diluent, the calculated price today for Canadian Bitumen at Hardisty is about $22.50 per barrel. If we subtract the cost of transportation from the field to Hardisty of $2.50 per barrel it appears that some Canadian Bitumen is selling today for $20 per barrel.

$20 per barrel as a price for Canadian production is terrible. But it gets worse. The trading community seems bent on re-visiting the low price point of the 2009 dip of about $33, about $12 per barrel below today’s price. If we do the arithmetic on WCS, then Dilbit, then Bitumen under a $33 WTI price scenario, we get a corresponding price for Bitumen at the wellhead of $7.50 per barrel. Not zero, but close enough to zero to be very uncomfortable. A further speculative-inspired drop into the twenties would almost eliminate the remaining value for Bitumen.

Obviously, the decision to continue to produce Bitumen would be reassessed well before the zero point. But where is that point? Even the $20 Bitumen price would seem to put some producers at a loss on a cash cost basis. But selling oil at an operating loss still brings in cash flow, important for making loan payments, so production will not necessarily stop even when the producers are operating at a loss. But that approach has finite limits.

In the past, transportation bottlenecks have presented the Canadian producers with prices as low as it is today. However that condition was temporary and relatively easily corrected with transportation innovation. The current situation is not temporary and the solution cannot arise from innovation on how to dispose of the oil. The only solution appears to be to refrain from producing the oil. This idea is antithetical to producers, who are a strong-willed group, but in this case they may have met their match. In spite of strong and vigorous determination, it is still impossible to put ten gallons of oil in a five gallon bucket. Canadian production WILL be shut in.