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Keep the barrel, dump the crude? Oil has crashed below the cost of an empty barrel

Canadian oil sands producers struggling to make a buck from a barrel of bitumen would have better luck dumping out the oil and just selling the empty barrel.

Western Canada Select – the oil sands benchmark – has always been the lowest-priced grade of crude on Earth. With the better-known benchmarks of West Texas Intermediate and Brent barely able to maintain US$30 levels on a per-barrel-basis, WCS is at its lowest level ever: under US$17 per barrel and falling.

Buying an empty barrel, by comparison, will run about US$78.39 on Amazon. Assuming there are a bunch of empty barrels sitting around Alberta, this would seem to be a great, high-margin business model. Fill those empty barrels with some of the province’s ample freshwater supplies and – based on the average cost of bottled water at US$1.21 per gallon into a 55-gallon barrel – that value increases by US$66.55.

Even Alberta’s air, when bottled, is selling for many times the price its oil. Edmonton-based Vitality Air gets about $4.16 per litre of fresh, Lake Louise breeze. There are about 160 litres in the industry standard 42-gallon barrel, giving Alberta air a per-barrel price of C$665.60, or US$463.49.

That makes Alberta’s air about 27 times more valuable than its most commonly-produced crude oil.

There is clearly too much oil in the world, so why don’t producers just shut down their pumpjacks, cap the wells and sell the empty barrels? Or better yet, fill them with water or even just air, and amplify the profit?

The answer, unfortunately for those struggling oil producers, is crude oil hasn’t been collected, transported or sold in actual barrels for the better part of a century. At least, not on any sort of significant scale.

Early crude oil producers in the 1860s took their cues from what at the time was a much bigger industry: booze. At the time, a standard whiskey barrel held about 40 U.S. gallons and the standard was quickly adopted by the petroleum sector. In order to ensure the first crude buyers received every drop, they typically overfilled their (gently used) whiskey barrels to 42 gallons to account for spillage while in transit.

Barely a decade into the rise of the new industry, Standard Oil started buying tracts of oak timber in 1870 in order to make its own barrels. The process cut the cost from US$3 down to just US$1.50 per barrel.

Adjusted for inflation over the past 145 years, Standard Oil’s empty barrels would cost about US$27.27 today: or about three bucks less than one filled with crude.

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