Jeff Rubin predicts disaster on Canada’s railways

The economist says a lack of pipelines and surplus of oil spells trouble on the rails

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Andrew Tolson

Andrew Tolson
Jeff Rubin, author and former CIBC World Markets chief economist, correctly warned of a big real estate slump in Ontario in the 1990s and soaring oil prices in the 2000s. While his prediction that oil would hit $225 a barrel by 2012 didn’t come to pass, he says his mistake was to underestimate how quickly rising energy prices would put the brakes on economic growth.

Transport infrastructure in North America—mainly pipelines— hasn’t kept pace with the explosion in North American oil production. So you’ve got, in effect, a lot of stranded oil. That’s why, of course, oil is being loaded onto railcars out of the Bakken (in North Dakota)—and we’ve seen the tragic consequences of that in Lac-Mégantic. Meanwhile, there are already three rail terminals being constructed in Western Canada. All together, Canada may go from moving about 200,000 barrels of oil a day by rail to 900,000 barrels of oil, which, incidentally, is more than the Keystone XL pipeline. That’s been the de facto way that the industry has dealt with the pipeline bottleneck. Without rail coming to the rescue, the Bakken wouldn’t be producing 900,000 barrels a day and it wouldn’t be possible to increase production out of the tar sands either.

But what’s going to happen is, one of these days an explosion is going to happen in Chicago or Toronto, which are areas that get lots of oil passing through by rail. The train that blew up in Lac-Mégantic went through Toronto, in fact. When that happens, it will change the whole nature of the equation. The lawsuits are going to dramatically hike the insurance costs for railroads. And when I say we’re going to have other disasters, I’m not making a statement about corporate negligence or malfeasance. I’m merely talking about the laws of probability. Rail is a far more expensive and hazardous way of moving oil than pipelines.

Ottawa and the industry have grossly miscalculated the economics of the oil sands. Western Canadian Select, the price that oil sands producers get, is around $58 a barrel and the costs of new production are anywhere from $70 to $100. To me, that doesn’t sound particularly attractive.

The reality is that nobody likes pipelines in their backyard. When we imported oil, moving it was somebody else’s problem. There are oil spills every day in the Niger Delta, but we don’t care. Out of sight, out of mind. Moving oil around the world is a messy business that we’ve never had to deal with. But now that we are, we don’t like it. We don’t like pipelines so the oil industry has gone for rail, but I suspect we will like rail even less.

As time goes by, I think you’ll find that the Suncors and Canadian Natural Resources of the world will find it more difficult to raise the capital they need to achieve their grandiose production plans. And that’s because their grandiose production plans don’t leave very much profit for shareholders. Now, if they could get Brent prices, which are about $112 a barrel right now, the folks in Fort McMurray would be very happy and Suncor would be trading a lot higher than it is today. But without solving the infrastructure problem, the discount will get worse because more production will pile up. However, I don’t see a huge rush anywhere in North America to have pipelines built. And I think this rail thing is a ticking time bomb that will not only backfire on oil producers, but will really backfire on railways.

As told to Chris Sorensen