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Top 5 sub-sectors in the Canadian energy market: Oil

Advances in fracking technology allow for a larger portion of reserves than was imaginable five years ago.

The Canadian energy market is a mess of tangled up government regulations, conflicting news reports and contradictory policy objectives. That mess, however, is a thriving and profitable marketplace for those who know how to navigate the energy landscape.

This report provides an overview of the five largest and most significant energy sub-sectors in the Canadian economy, beginning with oil. 

Over the last year, perspectives on Canada's petroleum markets have shifted from uncontrolled exuberance to decidedly cautious but positive.

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There are two big pieces of good news for Canadian petroleum. Production is rising and will continue to rise -- perhaps rapidly -- for the foreseeable future. First, the Bakken Formation now appears to hold much larger reserves than previously anticipated, and advances in fracking technology make a larger portion of those recoverable than was imaginable five years ago. Second, continued development of the tar sands deposits promises radical expansion of that market, too. Overall, Canadian oil production is expected to more than double by 2030.

At first, all that extra production looked like a black gold rush. Investors sobered up, however, as they watched global oil prices tank over the last year. In late 2014, the price of oil plunged below USD$50 per barrel for the first time since 2004. All that extra production from Canada, the United States and Russia functionally flooded the market just as demand growth started cooling off in China.

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The current prices are artificially low, according to most experts. Many analysts expect oil to climb back over USD$70 a barrel by the end of 2015. Provided the price stabilizes, Canadian producers will be able to count on a healthy profit. If prices were to plummet again, however, some of the smaller producers could face serious cash flow problems. Future production growth would also decline if prices stay low.

Another factor counseling caution in the Canadian petroleum market are environmental objections. The tar sands projects remain controversial because the process of extracting and refining tar sand oil is much more polluting than conventional drilling. The industry has largely overcome domestic protests to tar sand extraction, but the environmental lobby successfully persuaded President Obama to veto construction of the Keystone XL pipeline. The pipeline isn't essential for Canadian petroleum's growth, but it's a worry sign. If the environmental movement gains more steam, it might pose a real challenge to profits.

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Finally, Canadian oil will also have to compete with growing production from the United States. Most of the Bakken Formation is in North Dakota and available to U.S. petroleum countries. The U.S. has also expanded offshore drilling and, if the next president is a Republican, will likely increase drilling in Alaska, too. Since Middle Eastern production looks to be on the rise as well, it's possible demand will fall well short of supply and drive prices down further.

Overall, however, a few ugly splotches on the canvass shouldn't overwhelm the oil industry's rosy picture. Canada's natural oil wealth is larger than ever, and extraction efforts already in progress all but assure profitability.

Look for the next installment of our in-depth review of the top five sub-sectors within the Canadian energy market, in which we focus on natural gas and coal. 

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