The massive wildfire that is burning up the Canadian province responsible for the country’s oil production and causing a million-barrel-per-day shutdown won’t raise oil prices thanks to the oil glut, energy experts say.
The oil companies in the region have had to stop or slow production as the wildfires burn through 621 square miles of Alberta. The province is home to the country’s tar sands, which holds the world’s third largest oil reserves, behind Venezuela and Saudi Arabia. About 3 million barrels per day of crude oil comes from the region, with almost all of it exported to the U.S.
Oil companies have shut down production as families are evacuated from Fort McMurray and as the wildfires pose a risk to oil infrastructure. However, Thomas Corrigan, senior researcher with the Atlantic Council, said he believes that the shutdown won’t cause a huge change in oil prices, which dropped slightly Monday.
“Due to the glut of crude oil in the United States, where much of Fort McMurray’s crude is refined, we will not likely see a significant effect of the fire on global oil prices,” Corrigan said. “Today’s drop is a result of the state of inventory at American refineries. Recent and near-term fluctuations due to the fire, as we saw last week, are knee-jerk market reactions.”
The wildfires in Alberta are among the worst in Canadian history. The blaze has prompted an evacuation of 80,000 people, and some estimate it could be weeks before the fires are brought under control, let alone extinguished.
The strong El Nino system in the Pacific Ocean caused weather havoc for much of the world this winter and in Alberta that meant a much drier winter than normal. Unseasonably warm temperatures, dry weather and high winds turned hundreds of square miles of Alberta forest into tinder.
Luckily for oil companies, the blaze appears to be moving southeast, away from the oil fields in the northern part of the province. Ken Green, senior director of natural resource studies at the Fraser Institute in Alberta, said the fire is mainly affecting the towns where the families of oil workers live.
That production has shut down doesn’t mean that the tar sands are any less valuable, Green said. The oil is still in the ground and, as long as the fire keeps moving to the southeast, much of the infrastructure in place to remove it won’t be harmed.
Green said the industry has no idea when production might be able to start again. Officials in Canada are cautiously optimistic that the fires won’t hurt the tar sands.
“The value of the oil sands will remain … and companies have their long-term investments that they need to service, and thing will restart,” he said.
While oil from tar sands is a molasses-type substance when it’s at room temperature, it is mostly solid when underground, he said. That, combined with the fact that the fire seems to be moving away from the tar sands, means it’s unlikely it will reach the oil fields in northern Alberta.
When production does start, it won’t return to normal immediately, Green said.
“It’s a million barrels per day that’s been shut down and it’s going to take some time to come back, partly because they have to restart operations,” he said. “For a while, they’re going to need to bring people in from further away than Fort McMurray, and that will increase cost of operations.”
Corrigan said a lengthier stop could end up harming the Canadian economy.
Canada is heavily dependent on its oil exports, and gasoline prices in Canada could increase if those revenues aren’t coming.
“It will be a real test of the regional government and industry leaders to restore the human infrastructure needed to bring Alberta back to pre-fire levels,” he said.
