Based on recent experiences, some believe this week’s interest rate cuts soon will send oil to circa $120 a barrel.

Others are saying the winter heating oil demand is over and given the world’s precarious economic situation, oil will be down to $80 a barrel by summer. Both sides make plausible cases.

In the meantime, while waiting to see how this plays out, the question of just how much longer Canada will continue pouring so much of their national heritage into U.S. gas tanks has been in the news lately and deserves some consideration.

In recent years, Canada has been sending about 2.3 million barrels of oil each day, more than we get from the Persian Gulf, south of the border. The United States also gets about 3.4 trillion cubic feet a year of its natural gas from Canada. Many in the U.S. are expecting that increasing imports of synthetic oil extracted from Alberta tar sands will keep the U.S. functioning for many decades as other sources of oil decline.

If you are not that familiar with the Canadian energy situation, there are a few things you should know. Canada produces about 3.4 million barrels of real and synthetic (tar sands) oil each day and consumes about 2.36 million. So far, so good.

Canada is energy independent just like the Saudis, Russia, Mexico, and Venezuela. But I just told you something that doesn’t add up. If they are sending 2.3 million barrels per day to the U.S., they must be importing about 1.2 million barrels a day and indeed they are. Most of eastern Canada, including about half of Ontario, imports oil from abroad and is paying world prices. Of course, they are selling at world prices so the problem in the long run is not the balance of payments, but the availability. Add in some Canadian-style taxes and drivers north of the border are currently paying about $4.25 a gallon for gasoline unlike their fellow oil-exporter, Venezuela, where they are paying about 17 cents.

Another major factor in this equation is the NAFTA treaty with the U.S. which requires Canada to keep dividing its oil production with the U.S. in the current proportions, even if production is declining. Neither country may reduce the proportion of its energy exports to the other relative to the "total supply" of the exporting country during the prior 36-month period. Among other things this makes it tough to sell oil to China, should the Canadians be of a mind to do so.

The next big problem is that conventional oil production in Canada has just about peaked. As is well known, there is a huge quantity of hydrocarbon in the form of tar coated on grains of sand in Alberta – some say 180 billion barrels (a 5-year supply for the whole earth), some say more than a trillion. The key point however is that it takes massive amounts of heat, currently provided by cheap natural gas, to melt the tar off the sand grains and the whole operation leaves behind the most gargantuan environmental mess ever conceived by man.

The last thing you need to know is that the Canadian constitution leaves resource exploitation up the provinces (such as Alberta) which can sort of do anything they want, while putting the Federal Government (Ottawa) in charge of the environment. While the current Alberta government is second only to Beijing in its devotion to economic development at all costs, Ottawa although currently in Conservative hands, takes its environmental responsibilities seriously.

For many years now, knowledgeable Canadian observers have been complaining about the situation. Why is “energy independent” Canada importing 55 percent of its oil requirements at world prices while sending 2.3 million barrels a day to the United States? How can Canada meet its Kyoto obligations while increases in tar sands oil production will increase their share of Canada’s greenhouse gas production from the current 18 percent to 25 percent by 2020? Why are we using so much natural gas to melt off the tar when natural gas production is projected to decline? Last fall there was furor in a parliamentary hearing when the speaker told the body that Eastern Canada will soon be “freezing in the dark.”

Last month, Ottawa announced details of tough new environmental regulations that will require new tar sands operations starting in 2012 to implement carbon storage and capture. The plan which applies to industrial and coal-fired power plants all over Canada aims to achieve a 20 percent reduction in overall greenhouse gas emissions by 2020.

The political maneuvering and wrangling over these new regulations will likely go on for some time. The most obvious effect will be a major increase in the costs of building new tar sands production capacity which is already so expensive that some companies are starting to pull back.

From the U.S. point of view, the prospects for continuing Canadian synthetic oil production have taken a turn for the worse. Anyone who mutters “oil sands” when confronted by the prospect of depleting oil production needs to do some homework. As conventional oil production in Canada starts to decline in coming decades, it is doubtful that increased production of synthetic crude will be available to make up for the decline much less to increase Canada’s production.

The big question in the next 10 years is what happens to NAFTA and the proportionality clause that sends so much Western Canadian oil down into the U.S. A big issue is that currently there is no pipeline bringing oil from Western to Eastern Canada. Trains are just not up to moving oil in the volumes it is consumed today.

If the calculations about the course of the world’s oil supply are correct, in two or three years prices are likely to increase markedly as demand simply outruns supply no matter the state of the world economy. When Canadian gasoline prices, currently a dollar or so a gallon higher than in the U.S., increase by several more dollars, political pressures on Ottawa will increase rapidly.

The real problems will come when shortages develop in Eastern Canada while oil is still being pumped into the U.S. At that point, a major paradigm shift in the U.S.-Canadian energy relationship is likely to occur.