Economic Merit & Impacts

Portions of the following appeared in the Lake of the Woods Area News (July 2014), and are reprinted here with additional material.  Reprinted with permission from the author, Teika Newton.

Oil sands production in Canada occurs within a fairly narrow set of economic constraints. The cost to produce a barrel of Alberta oil sands oil is about $90 per barrel[1] so the price of oil must be at least this high to justify production. However, when the price reaches $100 per barrel, the cost of oil starts to become competitive with some of the lower priced alternative sources of energy. Around $140-$150 per barrel, oil is on par with most alternatives, including solar (wind is already at cost parity with oil at current prices), and at $200 per barrel, oil is vastly economically outcompeted by these alternatives. As the price of oil rises, consumer habits also shift. During 2008 when the price of oil peaked in the $145 per barrel range, consumers started downsizing their vehicles, restricting their travel, increasing their transit usage, and generally reducing their demand for fuel as a response to the high cost.[2] Today’s Brent Crude Oil price – the price of oil on international markets – is well over $100 per barrel, within the range of costs at which alternative fuel sources are starting to become competitive. With an additional carbon tax imposed, alternatives become even more attractive, thus weakening the case for continued hydrocarbon fuel exploitation.

Meanwhile, in Canada, oil trades at a discount relative to Brent prices.  This means that in order to maximize revenues from Canada’s oil resources, it makes more sense to ship product to coastal seaports and sell it to offshore markets at higher, international prices.  This is the motivation underpinning the Energy East project.  Energy East is not a project meant to satisfy domestic needs, with as much as 90% of the product destined to get shipped overseas unrefined.

When evaluating the economic merits of the proposed Energy East project, oil production costs are not the only factors we need to bear in mind.   Energy East promises jobs as well as potential tax benefits. In our area, the project would retrofit an existing pipeline, so no new land needs to be acquired by the proponent. With the company holding no additional real estate base, it is unclear that the municipality would gain tax revenue from the project, although the addition of a new pumping station may have some bearing on TransCanada’s property assessments, which may in turn affect municipal taxes.

In terms of jobs, TransCanada commissioned a study by Deloitte on economic benefits of Energy East, in which it estimated that the project would create 7,700 short-term jobs nationally (1,700 across Ontario) during the 2016-2018 construction phase of the project, and would likely sustain up to 1,000 jobs nationally (181 across Ontario) over the 40-year lifetime of the project. The Deloitte study does not further break down job opportunities by project segment or community.  On the other hand, a subsequent report filed by Environmental Defence, the Council of Canadians, Equiterre, and the Ecology Action Centre found Deloitte’s estimates over bullish, and suggested the Energy East may in fact result in few or no new jobs, even in the Maritimes where support for the project is high on the prospect of a related economic boom.

Against these potential benefits, we must weigh long-term economic impacts of the Energy East project.

Oil sands oil can only be viably produced while prices are between about $90 and $150 per barrel. At the same time, the value of the resource is not truly reflected in the cost we pay for it. Since its adoption in the mid-19th Century, fossil energy has been an uncontested boon to humanity, freeing us from the constraints of manual labour, and facilitating the rise of countless invaluable consumer goods – everything from catheters to surgical equipment to chemical fertilizers and pesticides. It is estimated that the caloric value held within a single barrel of oil represents as much potential work as a human manual labourer working full-time for eight to ten years. Were we to value oil by a wage scale, a single barrel of oil displaces 8-10 years of earnings (an average in Canada of $450,000) from the economy! Yet the price of oil has hovered around $100 per barrel for the past several years. In other words, it is a commodity that we greatly undervalue, despite our deep dependence on it. The result is that we grossly overexploit the resource.

Perhaps unsurprisingly, then, fossil energy is becoming more and more difficult to obtain at a low cost. Conventional reserves of crude oil are drying up, pushing us to explore in more marginal environments, and to extract oil from unconventional sources including Alberta’s oil sands and the various North American shale fields, at greater and greater risk to human laborers and to the natural environment.

Canada, and Alberta in particular, are rich in unconventional fossil energy supplies. Herein lies perhaps the perennial conundrum for the development of resources in a country as well endowed as Canada: how much and when to exploit, and how much to conserve and hold in reserve? While the alarm bells sound on climate change, the promise of reaping incredible wealth from increased resource development is hard to resist. In this regard, Kenora has wisdom to offer, for like many communities in the northwest, Kenora has good first-hand knowledge of the resource extraction economy. If there is one thing we have learned from the highs and lows of our long forestry legacy, it is that it makes good sense to manage a resource wisely, aiming for conservation and maximum local value, rather than rapid, unsustainable expansion and exploitation. It does not make sense to accumulate quick wealth if, in the end, one’s community or one’s nation is left impoverished of resources and habitable environment. Unlike the renewable forest, once fossil energy resources are depleted, they cannot be replenished.

We must be prudent in our economic planning, and engage in a comprehensive national discussion about management of our resources, including our energy resources, and we must adopt a national energy policy that will help us to navigate both the challenges imposed by a changing climate, and the inevitable transition away from fossil energy.

 

[1] Rubin, Jeff. Demand Shift, in Carbon Shift: How Peak Oil and the Climate Crisis Will Change Canada (and Our Lives), Vintage Canada, 2009, p. 150.

[2] Homer-Dixon, Thomas and Nick Garrison, Introductionto Carbon Shift: How Peak Oil and the Climate Crisis Will Change Canada (and Our Lives), Vintage Canada, 2009, p. 14.

 

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