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The Price of Energy: Canada's Challenge and Opportunity

The Carbon Brief (TCB) suggests that in order to meet the two degree planetary warming limit 75% of Canada’s petroleum reserves will have to be left in the ground.  Globally it is estimated 35% of petroleum reserves must meet the same fate. The reason why Canada’s quota is so much lower is because over 95% of its reserves are oil sands deposits in the province of Alberta that are one of the most expensive and emissions intensive sources of oil. Further efforts to lower emissions simply increase the cost of the final product.

TCB points out that “Because of the expense of CCS (carbon capture and sequestration), its relatively late date of introduction (2025), and the assumed maximum rate at which it can be built, CCS has a relatively modest effect on the overall levels of fossil fuel that can be produced before 2050 in a two-degree scenario”.

As well as oil, TCB suggests 52% of the world’s natural gas reserves and 88% of its coal must also remain buried.

This extreme carbon diet will create a huge energy void that will have to be filled with emissions free and preferably renewable energy sources.

As cost is a constraint in a declining carbon market, so too will that be the case in an increasing renewable energy sector.

As is suggested here Canadian technology not only has the potential to be the lowest cost renewable, it could also produce the greatest climate dividend.

As things currently stand Canada has the unique and almost incomprehensible opportunity to lose out on both ends of the energy tug of war between fossil fuels and renewables.       

It needn’t and shouldn’t be that way.

In a 2006 address to the Canada-UK Chamber of Commerce Prime Minister Harper suggested that Canada should aspire to becoming a global energy superpower. We are witnessing, he said, “Canada’s emergence as a global energy powerhouse — the emerging ‘energy superpower’ our government intends to build.” Based on the oil sands, the project involves “Brobdingnagian technology and an army of skilled workers. In short, it is an enterprise of epic proportions, akin to the building of the pyramids or China’s Great Wall. Only bigger.”

As Isaac Arnsdorf  pointed put however in Bloomberg’s QuickTake: Oil Prices, Feb.11, 2015: “Oil is so much more than a fuel. It’s a force even bigger than its $3.4 trillion market. It’s a weapon, a strategic asset, a curse. It’s a maker and spoiler of fortunes, a leading indicator and an echo chamber. All these roles have a part in setting its price. The result is a peculiar market that says as much about global economics and politics as it does about supply and demand.”

Indicative of the vagaries of that market the article was accompanied by the following chart of oil prices from 1983 through 2014.

 

At the time of Prime Minister Harper’s declaration, the price of oil was rising and in fact was at an all time high. Subsequently it has plunged twice on account of the Financial Crisis of 2008 and more recently due to the OPEC price war.

In the first instance it quickly rebounded to 2006 levels and Canada’s economy weathered the finacial crisis better than most, in no small part due to increasing oil and gas production per the following chart from OilPrice.com.

 

The full consequence to Canada of the most recent plunge however is yet to be determined but as the Globe and Mail recently put it, There will be blood.

Canada’s former Environment Minister, then bank Vice Chairman and current Premier of the Province of Alberta asserted in a 2011 speech to the Calgary Chamber of Commerce that the impediments Canada face in becoming a true energy superpower within a decade are the needs to diversify energy markets and improve environmental sustainability.

“We need to have diversified markets to ensure the best marginal price and to reduce our market risk. And the road to diversified markets runs through our west coast and beyond to the countries of Asia-Pacific,” he said.

The west coast however isn’t much interested in putting its resources, scenery and salmon amongst them, at risk to oil spills, environmental sustainability in Canada is going nowhere and to say the price of Alberta’s resource is marginal at best is putting it mildly.

Even though the federal government turned its attention to China when the U.S. put up roadblocks to the Keystone XL pipeline as an avenue to diversifying markets, and allowed the state-owned China National Offshore Oil Company to purchase a major oil sands player for $15 billion, PetroChina is now looking for a  painless exit from the oil sands.

 To make matters worse if you look at the schedule of Alberta  Oil Sands Royalty Rates, when the WTI (West Texas Intermediate) crude oil price is below $55, as it is today and the EIA estimates it will remain the rest of the year, the owners of the resources, the citizens of Alberta, get next to nothing; 1% of gross and 25% of net revenue. Since the cost of production is so high net revenues will be sharply reduced so both the province and federal government coffers will feel the pinch as many oil sands producer struggle to stay afloat.

Further the following Financial Post chart shows the kind of impact low prices will have on oilsands projects going forward.

 

Ipolitics.ca crystallizes what many Canadians have been thinking for a long while, “Someone should have told Harper in 2006 that it’s never a good idea to build your entire economic, fiscal and political strategy on a single, highly-volatile commodity price.”

Even Alberta Premier Prentice has said, his province has to  “get off the oil roller coaster”.

There is a huge market out there in search of an energy source that will fix the climate problem. We are sitting on what the world wants and needs. The economic and social opportunities presented by servicing that market far outstrips anything the petroleum industry has to offer.

It would be UNBELIEVABLE if mulish political pride, let alone something more sinister, were to make Canada a loser at both ends of the energy tug of war!

Jim Baird's picture

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