Volatility of Bitumen Prices and Implications for the Industry |
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| Authors: | Emil D Attanasi |
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| Institution: | (1) US Geological Survey, National Center Mail Stop 956, Reston, VA 20192, USA |
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| Abstract: | Sustained crude oil price increases have led to increased investment in and production of Canadian bitumen to supplement North
American oil supplies. For new projects, the evaluation of profitability is based on a prediction of the future price path
of bitumen and ultimately light/medium crude oil. This article examines the relationship between the bitumen and light crude
oil prices in the context of a simple error-correction economic-adjustment model. The analysis shows bitumen prices to be
significantly more volatile than light crude prices. Also, the dominant effect of an oil price shock on bitumen prices is
immediate and is amplified, both in absolute terms and percentage price changes. It is argued that the bitumen industry response
to such market risks will likely be a realignment toward vertical integration via new downstream construction, mergers, or
on a de facto basis by the establishment of alliances. |
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| Keywords: | Bitumen price volatility uncertainty vertical integration |
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