The analysts said those exotic investments like Canadian Energy Trusts, and Yukon-Territory Tar Sands were supposed to be slam dunks with oil going to $150. The stocks were even being touted by those looking to build a conservative dividend-paying portfolio. But, it turns out oil can tick down too, and in short order the Canadian stock exchange has dropped to its lowest level since this summer. Not exactly the kind of action one looks for in a dividend-paying portfolio.
A couple of months ago, we linked to this article from fortune which describes all the oil activity going on in the great white north. Looking back this passage should have jumped out at us:
The oil sands are only a small piece of America's energy puzzle. But with production expected to triple to three million barrels a day by 2020, it's an important one. Over the same period, U.S. domestic production is projected to fall, and the U.S. is clearly anxious to protect its backyard supply lines. Congressional delegations are new to the oil-sands patch, which has historically been considered a quixotic bet suited only to high-stakes mavericks. Since the mid-1980s, though, incremental improvements have driven down the cost of production from $30 a barrel to $20, according to Neil Camarta, senior vice president of oil sands for Shell Canada, the lead partner in Albian Sands, along with Chevron Canada and Western Oil Sands, a Canadian company. That's still a lot compared with the $3 it takes to produce a barrel in parts of the Middle East. But with costs coming down, technology improving, and the price of oil rising, the oil sands are becoming downright mainstream. More than a dozen companies are planning to spend $60 billion on new projects and expansions over the next decade.
First of all, why should prices continue to rise as costs continue to drop? It shouldn't and it won't. The cost of oil is, in the long-run,determined by the cost of selling the last barrel. It's safe to presume that new fields up in the middle of nowhere in Canada are that proverbial "last barrel". Secondly, while the cost of Canadian oil looks a lot more expensive than Saudi Oil ($20 as compared to $3) it shouldn't be thought of as 600% more expensive but rather $17 bucks more expensive to drill. This is important to understand when analysts are throwing out per-barrel estimates between $40 and $90 higher than where we are at today.
If those risky oil trusts do fail to be the slam dunk people think they are, nobody should be surprised--nothing in markets occurs if everyone is predicting that it will.
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Posted by: Louis Vuitton 2012 | January 04, 2012 at 12:28 PM