A $6 Billion “Bitumen Bubble”…Really?

It’s the “bubble’s” fault.  According to Alison Redford a “bitumen bubble” triggered a nose dive in oilsands crude prices resulting in a $6 billion shortfall in Alberta’s resource revenues and leaving Albertans $6 billion short for the upcoming budget.*  Ouch!

English: Reflection in a soap bubble. Français...

Is this true?  Is the “bitumen bubble” the culprit?  What is a “bitumen bubble” anyway?

Here’s the scoop on “bubbles”.  An “economic bubble” develops when the price of product skyrockets because investors are speculating about its price in the future—they’re convinced that the price will rise.  This “irrational exuberance” has nothing to do with the intrinsic value of the product.  The price expands on thin air and like a soap bubble, bursts with no warning.  *Poof* Prices collapse, investors jump out windows and financial chaos reigns.

The history of economic bubbles, starting with the tulip mania bubble right through to the dot.com bubble and the US housing bubble, demonstrates that bubbles are a very bad thing. 

Now compare the economic bubble scenario to Premier Redford’s “bitumen bubble” rationale.  There is no “irrational exuberance” driving up the price of bitumen.  The so-called “bitumen bubble” did not burst because sanity somehow returned to crude oil markets causing prices to plunge.  Quite the contrary.  Crude oil producers know that bitumen is undervalued, not overvalued, in the market place by simply looking at the the difference between the WTI price and the Western Canadian Select price.

To put it bluntly, Redford’s “bitumen bubble” is a myth, a clever PR hack’s attempt to explain or obscure (who knows with this government) a much more serious problem.

English: Cold refined bitumen

Cold refined bitumen (Photo credit: Wikipedia)

What we’re experiencing is a market dislocation caused by (1) Alberta oilsands producers oversupplying the market with bitumen, (2) a lack of pipelines to take this bitumen to the US Gulf Coast and Asia and (3) increased competition  from Bakken (North Dakota) producers who are moving into Alberta’s US and Eastern Canadian markets.

This market dislocation will continue until producers develop new markets and lay down new pipelines to serve them.  Don’t expect this to happen any time soon.

When Premier Redford dropped the bitumen bubble bomb her implicit message was this:  Brace for 6 billion dollars of collateral damage to education, healthcare, infrastructure, etc.   Equally troubling was how she delivered this message.

On Wed Jan 23 she sent an email to PC party members (“As loyal party supporters, I wanted to let you know first”) foreshadowing her speech but essentially saying nothing.  On Thur Jan 24 she told the media that contrary to past practice, they would not be receiving advance copies of her 8 minute speech and furthermore they were prohibited from reporting on the speech for a full hour after she’d given it.** How much time does it take to digest 8 magnificent minutes? 

The speech, like the “letting you know first” email, was as light as air and burst upon contact with reality.

It contained only two pieces of new information.  One was the confirmation that the deficit was indeed the $6 billion number that the media had been floating for weeks.  The second was the announcement of the first annual Alberta Economic Summit, a vehicle for business leaders and academics to have yet another “conversation” about the budget.  This is the third “conversation” the government has had with Albertans about its budget.  Last year Ron Liepert chaired an invitation-only roundtable and the government kicked off the Dollars and Sense survey project.  Apparently they still haven’t gotten it right.

The 8 minute speech was both vacuous and bizarre.  At times, the Premier was defensive—it wasn’t her fault that the government missed its 2012 oil price forecast, a bunch of analysts had made the same mistake.  (She failed to mention that these analysts continued to update their forecasts throughout the year as oil prices fell, while the government waited until the fourth quarter to raise the alarm).

The Premier’s efforts to cosy up to Albertans with references to her father and her daughter Sarah did nothing to support her allegation that Alberta has world class healthcare and quality education, and the use of multiple jump-cuts after she finished each sentence was jarring (it did however allow her to correct any flubs along the way).

Forgive me, but I’m uneasy.  The Premier’s “state of the budget” address, starting with a catchy but fallacious reference to a “bitumen bubble” and ending with the “we’ll get through this together” pitch tells me that the government plans yet another round of austerity cuts without making any effort to re-think the structural problem (its continued reliance on volatile resource revenues) that got us into this mess in the first place.

We could wait patiently for another four decades while they figure it out…or we could show them the door in the next election and elect someone with creative ideas and more fiscal sense.

English: Soap bubble reflects the sky

I’m all for bursting the PC’s bubble and starting fresh with a new government.  What about you?

*Premier’s Address to Albertans, Jan 24, 2013

**Calgary Herald, Jan 26, 2013, A9

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21 Responses to A $6 Billion “Bitumen Bubble”…Really?

  1. Rose Marie MacKenzie-Kirkwood says:

    Pretty bubble, but not very productive. I am with you, if you can’t do the job get out of the office. Here is BC when you hire someone you can let them go within the first 3 months of employement if they are not working out because you can never guarantee that a new employee with mesh well with the existing staff.

    Is there anyway we can get government to employ the same strategy and can someone please also inform government “less talk more action.” I am one of the little people and happy to be a working bee because I like getting things done. Maybe it is time to invoke “bring a politician to work day” and show them how it is done.

    • Rose Marie, what a terrific idea! Instead of hiding “under the Dome” it would do politicians good to get out into the real world and see how their brilliant ideas play on the ground. Sit them next to the ER triage nurse who’s stacking patients up like cord wood in the hallways because there are no beds, or make them sit with the teachers and students who are bundled up in their overcoats because the school furnace is broken. It’s appalling that this government has mismanaged our wealth so badly that even basic services are suffering.

  2. goinfawr says:

    Western Canadian Select futures for next month delivery trading on the CME have gained over 7% since last Monday…
    Is it just me or is the idea of reforming our laughingstock-of-the-oil-producing-world royalty structure a glaringly obvious omission in this whole discussion? Oh wait, I remember what happened the last time Alberta tried to go there in late 2008….

    Perhaps this is merely the barge our Premier was instructed to tow in Chantilly Virginia last May?
    “Hello baby, yeah, this is the Big Bopper speakin
    Oh you sweet thing
    Do I what
    Will I what
    Oh baby you know what I like…”

    • You may well be right. Given the number of energy industry heavy weights who attended Bilderberg last May (including the powerful Koch brothers) I’m sure the place was bursting with kind souls happy to encourage Ms Redford to make sure the energy industry remains profitable and to pitch in with lower royalties and more corporate subsidies if the industry runs into trouble somewhere along the way. Surely it’s time for Albertans to stop subsidizing the energy industry through corporate welfare. PS. Thanks for the song Goinfawr!

  3. Julie Ali says:

    I really cannot blame any of our elected representatives because they aren’t actually our actual government. Our actual government is the oil industry and corporate entities in Alberta who manage the puppets we have in government.

    I’m not sure that electing another bunch of clowns will make much difference in Alberta and if we do hire another bunch of these nitwits it better not be the Wildrosies because Harper is a fine example of what we will get–money hemorrhaging out of all pores and the sort of democracy that approaches the ones in China and Russia. The only good thing about the current radical conservative parties everywhere is that I have finally woken up as a citizen and found myself—to my horror—to be surrounded on all sides by Republicans and Tea Party politicians.

    I think we actually need INTELLIGENT, WELL TRAINED managers in government who understand a financial spreadsheet and do not lie to us about what they see on that sheet. Also it would be useful if they explain what they put down on the spreadsheet.–vague terms like “Other” just don’t do the job for this taxpayer:

    Click to access goa-2011-12-annual-report-financial-statements.pdf

    An odd expense simply noted as “Other” cost us $371 million.

    How much did we pay in taxes?
    In 2011 citizens paid the following amounts (in millions):

    Click to access goa-2011-12-annual-report-financial-statements.pdf

    Income taxes
    Personal income tax 8,450
    Corporate income tax 3,498
    Total 11,948

    Other taxes

    Education property tax 1,858
    Tobacco tax 896
    Fuel tax 849
    Freehold mineral rights tax 129
    Insurance taxes 294
    Alberta tourism levy 73
    Total 4,099

    So let me add citizen payments up –$11,948 + $4,099= $16,047 million.

    The oil industry paid $11,636 million.

    Wow. We—the public paid more than the oil industry for this dullard government’s messes.

    And how much did those 13 oil companies earn in 2011 (which is not even all of these companies)?

    They earned $148,011,147.


    1) Suncor Energy 39,337,000
    2) Imperial Oil 30,992,058
    3) Husky Energy 23,364,000
    4) Enbridge 19,402,000
    5) Cenovus Energy 16,185,000
    6) Canadian Natural Resources 13.792,000
    7) Syncrude Canada 10,210,131
    8) TransCanada 9,139,000
    9) Encana 8,610,939
    10) Talisman Energy 8,414,624
    11) ConocoPhillips Canada Resources 6,998,164
    12) Nexen 6,464,000
    13) Gibson Energy 5,072,031

    That is quite a difference in revenues isn’t it folks?
    I mean I know it isn’t all just oil that gave them these profits (maybe some of it was gas) but certainly when you look at how much we could be earning if we nationalized the industry and did the work of getting the oil ourselves–we could end a lot of suffering right now but we’ve all been brainwashed in Alberta and terrified to say boo to a goose.

    Face it folks the only ones who are to blame in this mess –are Albertans.
    If you stick to ideology instead of commonsense you get this sort of corruption and cronyism and failure in governance.

    If we don’t boot them out –and hire non-ideological folks in we’re going to be stuck in this same mess forever.

    This business of hiring folks off the street is not working for us.

    If they can’t understand that the problem is a lack of revenues due to ideological stances that they are bent on maintaining, if they do not understand that they will be voted out in the next election (because no matter who works their one act dramas—we the people can actually vote them out you know), and if they don’t understand that government is supposed to be the moral and ethical force for our society to manage the global problems that a population encounters on a regular basis such as the revolution that is ongoing in citizen activism on all sides, well then we have government that is incapable of doing the job of governing.

    Unfortunately we are stuck with these people until the next election making a situation which is not (in my opinion) really that messy (because we still have some savings and we still have oil) but these drama queens will play the sad the sky is falling act until everyone believes that the sky is indeed falling in Alberta when actually its still quite sunny out.

    This chatter is simply an excuse for them to cut teachers and doctors when there is no reason to cut anyone except their Tory deadwood in government that they themselves hired and retained for no good purpose except to put them out to pasture.

    If they simply increase the oil royalty rate, all our problems disappear. Of course this will not go over well with their real bosses in the oil patch or with Katz and crew so this solution is unlikely to be attempted.

    Instead they will cut and then use whatever current public consultation data they have done in the last few months (to engage us in the austerity program) to impose personal tax hikes. I am sure they have data saying it is alright to increase personal income taxes of citizens but to leave corporate taxes and big oil alone. It is always the citizen who pays. Never big oil or the business sector.

    But there you go.We’ve been idiots.
    For far too long we have trusted that our government represented the people.
    Really the government in Alberta and in Ottawa represents big oil and don’t be afraid to say this folks.
    We still live in a democracy and can say this sort of stuff (mind you just don’t say it at work just yet because your workplace may be infiltrated with Tory spies).

    And in Edmonton we’ve been more idiotic than Calgarians because we hired a municipal crew that sold us out to the Katz fantasyland hotel (the Katz arena) that will shortly be built using corporate welfare that is all taxpayer money. Yeah, on the provincial side we get mugged and on the municipal side we get sold out. The citizen is not safe to walk the streets of Edmonton anymore.

    Hmm.. sorry I yapped so long. Also I heard Calgary was going to try for a Katz arena deal too. Who knew it would be so lucrative to fund a political party?

    • Wow Julie you did some real digging to find those statistics–very enlightening! I want to pick up on a very important point you made about this government not being the people we elected but rather the elite behind the scenes. In his book Power Where is it? Donald Savoie makes the point that power has drifted out of the hands of government and now lies in the boardrooms of international corporations. He says this was caused by a number of factors including enacting free trade agreements which shackle government power, the emergence of the political personality (eg. Harper) who rules his party with an iron fist so that our MPs no longer represent our views to him but rather his views to us and the shift in the nature of government bureaucracies from “neutral competence” (non-political) to “responsive competence” (very political) so that whatever the politician wants, the bureaucrat will deliver even if it’s a bone-headed idea. In Savoie’s view public policy is now created by special interest groups and PR hacks. The dramatic unveiling of Redford’s Bitumen Bubble would bear that out. Thanks for all the information Julie. It is very helpful.

  4. Midge says:

    Great post, Susan, as usual

    I’m all for bursting the PC bubble sooner rather than later. How refreshing it would be if we had politicians and bureaucrats that could actually speak straight talk, without coy innuendo. The over-spun stories that revolve around and around on themselves leave you believing nothing that comes out of their mouths. I think we Albertans are, on the whole, a bunch of pretty smart people, with lots of ideas and who are way too adult and intelligent to be continually talked down to and treated like small children.
    Economic Summit? We had a very high level one a couple of years ago with some pretty respected smart people that was quietly put on a shelf somewhere because it didn’t fit the agenda.
    – we paid a very large amount of money for it too!
    Until I see that ALL Albertans, even non-PC supporters (gasp) are included and their input is received with the respect we deserve, I will for one will be doing my best to burst any bubbles they want to blow.

    • Midge, you’re right, Shaping Alberta’s Future is an incredibly well written report which focused on 5 key strategies including energy and water.

      It highlights the need to consider taxation as a way of raising revenue. The panel said the time to act is now ie. 2010. So here we are 3 years later and still going around in circles. You’d think that a report written by the likes of Professor Sir John Bell, an Edmonton boy who’s now teaching medicine at Oxford and is the Chair of the Bill and Melinda Gates Foundation Scientific Program Advisory Committee would get Redford’s attention, instead she’s prattling on about a “bubble”. Go figure.

      Here’s a link to my blog on the report: https://susanonthesoapbox.com/2011/05/22/the-rapture-vs-albertas-30-year-strategic-plan/

  5. cyberclark says:

    Key points and misconceptions.
    Firstly; Remember Klein on his fireside saying read his lips; they are not going to privatize health care! Some things never change.
    She said they would start adding money to the Heritage Trust fund which hasn’t been added to in 25 years.
    Truth is: For 25 years this Government has frozen the investment profits of the Heritage Savings and Trust fund at 5%. Everything above was pulled out and sent to General Revenues where it was used to reduce taxes for the Oil Concerns chiefly and small business, just a bit. Individuals got next to nothing. In this period of time there was a long inflation stretch where profits should have been in the 25% range..

    This makes Albertans the highest taxed state in North America if not the world!

    For all intents and purpose the Heritage Trust was robbed and the money sent down pipelines to the US parent companies. It wouldn’t have been any faster as a bank transfer!

    This is another gross misconception; as close to a blatant, outright lie as one is going to get. It is a far greater transgression than a spin doctor campaign.

    The oil is extracted from the Bitumen along with High and Low vapor bases used in blending gasoline’s and diesel fuels. The resulting mix is a low volatile oil; cleaner than anything you will pull from the ground by conventional means.

    The WTI; The Brent; The West Texas Crude are designations in markets that indicate impurities, not API or the Weight of the mix Sulphur is the key indexer. Tar Sands crude is Sulphur free! It should be priced with the highest priced market out there!

    In order to get enough vapor base into the Tar Sands Crude, pristine sulphur free natural gas is added to the mix to bring it to the proper market desired vapor pressure to blend diesels and various gasoline.

    Not only is it oil, but it is oil that has been tailored to the refineries it is going to!

    You may recall a couple years ago Natural Gas wells North of High Level were shut in by the Government . This gas was needed for the blend. There was never any news of the compensation given to the oil companies who owned the wells. You can however bet it was the taxpayers who paid the price for it.

    In addition, the refineries in the US only have to heat the oil a bit to get their blends. This gives the US a low carbon foot print and Alberta wears the roses for the dirty part of the equation.

    She has said we are loosing 6 billion dollars short this year in oil revenues. Lets be more specific here. This is not royalty; they are zilch. It is the taxes off the various plants and shipping facilities. And, according to the Conservatives (It doesn’t matter who is the leader) taxes is all we are entitled to as Albert ans.

    She alluded to getting more for the oil at some nebulous time in the future. It is time to speak of patterns here. Stelmach popped out PDF showing impossible royalty rates going into the future. This was on the Eve of an election and no time to debate it. At the bottom of the page was 6 pt print saying all revenues are taken in Canadian dollars. That one line meant that we took an 18% cut in royalty at that point in time!


    I can hardly wait for the lies that will come out the next election.

    It is very worthwhile to note that the Wild Rose Party has criticized Redford saying there is no reason to change our take on Royalty or change the markets on oil.

    Three links that remain very important!



    • A lot of good reading here. The thread I’d like to follow is the need to understand what’s really going on. This is critical in order to recognize things like the “bitumen bubble” are nothing more than silly excuses intended to gloss over a bigger problem–namely that the government still hasn’t figured out how to manage its finances. If we don’t see through this latest effort to snow us we will surely pay the price.

      The well known economist Paul Krugman said “When you believe in things you don’t understand, bad things happen”. In this case we need to understand the dynamics of the oil and gas industry (as Cyberclark is doing) and challenge what we’re told. So time for me to put my money where my mouth is and write a letter to the Premier telling her that I don’t buy the “bitumen bubble” story and I expect her government to get real about sorting out this financial mess. The Shaping Alberta’s Future document would be a very good place to start. Thank you for your comprehensive comment Cyberclark.

    • Carlos Beca says:

      CyberClark – from your suggestions I asume that you are a stong supporter of the Liberal party. So I have a question for you
      Do you really believe if the Liberal party was elected in Alberta that they would change the current royalty framework?


      • cyberclark says:

        Yes, I do otherwise they would be out after their first term! No one in politics talks of raising royalty. Fact is we collect nothing. North Dakota had their royalty chopped to 17% when the Republicans were leaving office. With Alberta down at zero they have no leverage for recovery to their original 22%

  6. I think hiring a couple of Norwegians would solve the problem almost instantly. No more give away royalties, a sensible graduated provincial tax rate, and some equity in the industry would solve the problems forever — while we still have some prospect of resources left to exploit. I sure hope the Australians have better sense when they set about to develop their new shale oil deposits.

    • I agree Dave. This government appears to be big on studies, round tables and now “conversations” with Albertans (usually a select group of PC supporters), but does not seem too interested in talking with others who’ve faced the same challenges we have and worked out solutions that work for the people and the corporations. Rather a gutless approach to governing, I think.

      Interesting that you mention Australia. The fact that they discovered huge new shale oil deposits just upped the ante for Alberta producers, especially since one of the solutions to the Bitumen Bubble is a pipeline to the west coast and tankers to China–a market near and dear to Australia.

      • cyberclark says:

        Congrats! That was an obscure news break; you are right on top!

        I’ll use your comment as a segway.
        The Cons are somewhere between the outhouse and the proverbial wood shed!
        They have used their long entrenched tenure and not so carefully planned misdirection to ship all the money down to the parent oil companies in the south. Even robbing Alberta producers in their doing so.

        As the rime goes; “So little man so spic and span; where were you when the fit hit the Shan?”

        They are after everyone who will endorse still more taxes to help them pay the bill; not balance the books. It goes without saying they will be drawing on the principal of the Heritage trust fund yet again. And, the municipal pensions are threatened (again) as they try to cover the bills.

        The last most recent time around they made a make work program for oil workers dropping un-audited cash into the hands of oil companies to administer. As usual no audits and no accountability. This program was reported by them to have cost the Alberta Taxpayers (sustainability fund) 6 billion dollars.

        The reason for the program was because of the large percentage of illegal immigrants (Mostly US origin) working in the oil patch. Being illegal, not registered and not paying taxes they could not draw EI.

        Simultaneously to this AIMCO who “looks after” the Alberta Government pensions reported a 7 billion dollar lost attributed to bad investments. (Government is its only customer) and other like companies in the industry reported 3% gains.

        Kenny (Federal Conservatives) changed the immigration laws in such a way that any employer could grant a foreign employee citizenship. This of course had to unilateral to Canada. Now he says he is looking for a way to quickly deport law breakers. Hummmm?

        We have lost over 70 billion dollars from the Heritage Trust fund to date and its going to be hit harder. This makes us the highest taxes people in the world!

        Their meeting of like friends to charge more taxes will be interesting. More for who shows up than who votes what.

        Alberta has two choices for change. One is the NDP the second is the Alberta Liberals.http://albertathedetails.blogspot.com/2012/08/alberta-putting-aside-fear-what-do-we.html
        I am going to support the latter.

      • As you and Julie point out Albertans aren’t totally helpless. If we want to get out from under the burden of the PC government, its mismanagement of our resources and its culture of entitlement all we have to do is vote for someone else. There’s been a lot of discussion lately among progressives (Liberals, NDPs, Greens, and APs) on the topic of cooperation in order to avoid splitting the vote in the next election. Whether this will come to pass remains to be seen but I can’t help but think that if even half of the 60% of Albertans who chose not to vote in the last election could be persuaded to show up at the polls this time around things would be very different under the Dome.

      • carlosbeca says:

        The Australians will do what their new masters tell them to do and that is that the Chinese corporations have the best deal possible to take the oil away. I doubt they will do anything different – they are now completely dependent on their markets.

  7. Carlos Beca says:

    Many interesting points made by everyone, but Julie’s message says it all. This has been the situation since Peter Lougheed left. Neo-Conservatives launched the era of ‘Everything the Government does is crap’ and Mr. Klein even sold an 11% interest we use to have in Syncrude under the banner government has no place in business. Complemented by ‘Regulation is bad for business’. What this actually all meant is let them take everything they want and make that process legal.

    Many years ago this used to be called ‘Colonialism and Exploitation’, now it is called by many names that together represent the same – free trade, business efficiencies, productivity, privatization…..etc. I call it legalized robbery. It is happening at many different levels and oil is just one of them. What happened around the western world after the 2008 crisis is a clear example of the same in a different industry. Even in Canada, suggesting that our banks where different than everyone else is spin that worked.

    Our so called political class, know it, have the numbers and allow it to continue even when made aware of it. To me there is only one explanation. One either believes that is the correct way of running a province and to my estimation they are idiots and shoudl be removed, or they close their eyes and let it be and in this case I know where they should be.

    Now what I would like to know is what is it, in this sad and shameful situation, a person with our premier’s background and her government do not understand?

    • Carlos, I read somewhere that at times of economic contraction (like now) society begins to re-examine its basic values. I see a number of indications that we’re in a period of self examination right now: the US election was split along what the Republicans called Class Warfare, but the Democrats called helping the middle class, protest groups like Occupy Wall Street and Idle No More have sprung up out of absolutely nowhere, the en masse protests against Keystone XL and Northern Gateway have unified environmentalists, landowners and aboriginal groups and progressive voters are working feverish to find a way to work together in order to avoid splitting the vote in the next election. Only time will tell whether this re-examination is effective; but in the meantime it’s going to be one heck of an interesting ride!

  8. cyberclark says:

    This is an excellent forum Susan.
    Under the Alberta Conservatives the oil companies treat us worse than any banana republic they have conquered with force. People do not realize or afraid to that no matter what position or job you hold or in what industry be it oil or hanging drapes you would be far better off with just about any other Government going with the noted exceptions of the WRP and the Alberta Alliance. who are both working the oil agenda.

    Todays news: The Government leaves the door wide open for their application of indirect taxation even while saying no new taxes. The cities can balance their books on your utiility bills with no means to challenge them! Edmonton has already been cited with having the worlds highest priced water (April 2010 National Geographic),

    Under the Government guidelines they can charge what ever they want under the miscellaneous one line charges they invent readily.

    And, they will do just that! We are cash strapped.

  9. Cyberclark: your comment about today’s news was bang on. Today we learned that Ms Redford has appointed Barry Heck as the chair of the Alberta Economic Development Authority. Mr Heck is a long time PC supporter and supposedly helped arrange the $430,000 donation to the PCs (which is now being investigated). He was interviewed by Don Braid of the Calgary Herald and made a big deal about this appointment not being a “reward” for his efforts but something akin to a burden–he wasn’t getting paid, his time was very valuable, etc and so on. It was downright bizarre. The mere fact that Ms Redford made this appointment at the same time that the $430,000 donation is under investigation shows you that she’s absolutely tone deaf when it comes to understanding how her actions will be perceived by the public.
    PS Thank you for your kind words about the blog. Much appreciated.

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