Climate and competitiveness in the tar sands

Anytime the oil barons and baronesses are smiling for the cameras with NGOs and politicians, we should at least be interested, if not outright worried. Was the release of Alberta’s new climate change strategy just an occasion for the oil execs to ham it up for the cameras pretending all is well or do they have truly something to be smiling about?

Now, because I don’t want to constantly feel like the asshole at a party—complaining about children ingrates at a baby shower, enumerating an ex-husband or wife’s flaws at a wedding, laughing at a funeral—here’s an important positive: Alberta plans to use half of the money raised by its new broad carbon tax for “just transition” policies. A large chunk of the money will go towards supporting now-more-expensive heating, fuel and other consumption for poor and working families, while some will go towards retraining and other opportunities for those who lose their jobs. Just introducing the phrase “just transition”, which appears in the climate document four times, into the mainstream is a success.

I want to, however, focus on another phrase, much more dominant in the report: “competitiveness”. The report worries about the competitiveness of the tar sands with more stringent climate policies. Oddly enough, in a world of low oil prices, Alberta’s oil industry is already relatively uncompetitive. The biggest recent competing source of “unconventional” oil, fracked oil from US shale formations largely concentrated in North Dakota, has seen huge efficiency gains and falling break-even prices. This means that it is profitable to extract oil there at ever-lower global oil prices. In short, the tar sands are today having hard time keeping up with the pace of innovation elsewhere. Today, the lowest-cost producers of US shale oil can produce profitably at lower oil prices than producers in Alberta’s tar sands.

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Linda McQuaig is right, but there’s more to it

Since her common-sense quip that most of Canada’s tar sands reserves will have to stay in the ground, Linda McQuaig has been vilified by much of the political establishment and (rightfully) defended by a minority of voices in the media. That the facts of climate science vindicate her has made little difference to the debate. Is this because McQuaig’s comments have inadvertently scratched at a nerve that goes far deeper?

In what would be a world very different from our own, we can imagine a fairly straight line going something like this

Climate science → Climate regulations → Fiscal policy → Just transition

First, climate scientists tell us that 85% of tar sands reserves (given how high-cost they are) will most likely have to be left in the ground if globally we are to limit warming to two degrees. In response, the Canadian federal and provincial governments slowly stop subsidizing oil development, stop funding oil-related infrastructure and prepare for industry phase out (by for example, increasing royalties as extraction nears a limit). Next comes a big push for developing green projects, whether funded through direct spending or incentives. As the oil jobs and industries wither, new green jobs, new green industries and compensating income transfers take their place. Voila: just transition level unlocked!

Have a laugh first, then ask, where is the major stumbling block between this make-believe world and our own? For now politicians are acting and being berated for differing at the first step: brushing off the problem and effectively denying the climate science. Yet beyond Petroleum Correctness is a set of increasingly onerous political and economic constraints. (more…)

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Calling the business bluff in Alberta

The votes had barely been counted in Alberta when stories purporting to herald capital flight, particularly from the oil sands, were already appearing in venues like the Financial Post. As if on cue, the TSX fell 2%,the day after the Alberta election. What are we to make of this? Is Notley’s Alberta in the position of Rae’s Ontario 25 years ago, already being undermined?

An assessment of the NDP’s victory in Alberta grounded in reality has to account for the fact that the place of the oil industry in the province is, for the moment, being left largely unchallenged. This is no value judgment: support for the industry is the default position of most Albertans, not just elites. Given the economic importance of the oil industry and relative lack of economic diversification combined with the absence of a mass movement pushing against oil extraction and dependency, this should not be surprising.

The Alberta NDP’s program seeks to redistribute the gains from a resource economy largely left untouched. This general tendency is moderated by commitments to greater consultation with First Nations and an end to active lobbying for the Keystone XL and Northern Gateway pipelines. The latter, however, is a practical decision based on the small likelihood of these being built. All the while, for example, oil by rail continues to gather pace. The flip side of greater spending on social welfare are policies to recapture more of the proceeds of the oil boom while leaving its fundamentals intact: moderate tax increases and a planned royalty review.

For now, it seems the warnings of capital flight are thus a first salvo with a blank round. The dire words from parts of the business press and business elites are mostly bluster. Many business figures are actually taking a conciliatory tone; even the infamous “five CEOs” have taken it back. Fear-mongering is mixed with courting favour. (more…)

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Let’s not be too quick to cheer for the market as oil prices slump

Another title for this piece could be oil prices and politics. The last few weeks have been full of worries about the fate of Canada’s oil sector. Global oil prices are falling, pipelines are stalled and a few prominent tar sands investments have been canceled. All of these stories have been accompanied by cheering from the barricades representing those who want to Canada ween itself off its high-carbon fossil fuel industry as quickly as possible.

I, too, won’t be shedding any tears for the tar sands but it is good to keep things in perspective. Questioning the market for allocation of investment towards more fossil fuel development and more climate change, the lesson of the week is not to cheer too quickly for the market’s changing fortunes. Here’s a few charts that provide some of that perspective. (more…)

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Paths old and new: beyond the tar sands

This is an expansion of my last piece on the tar sands. The expanded form was republished as a Bullet at Socialist Project. I’ve decided to post the new bits here as they can stand alone.

On a path to nowhere

One way to see how this happens is to turn to the concept of path dependence from the language of mainstream economics. Path dependence is the idea that history matters and reverberates strongly in the present; more metaphorically, economic decision-making (whether about production or consumption) can follow increasingly well-worn grooves.  Indeed in many ways, path dependence is actually a powerful challenge to parts of the mainstream framework, undermining equilibrium and efficiency as paths can diverge from the “optimum” – and also potentially undermining rational choice theory as decisions viewed in isolation now seem irrational.

Even if the tar sands account for but 2% of our economy, getting off this path may be difficult. Taking seriously the idea that a large percentage of fossil fuels will have to be left in the ground to prevent even more dangerous levels of global warming, path dependence becomes even clearer. A recent report notes that 40% of “high-cost” oil projects planned over the next 10 years (requiring a high per barrel cost to break even) are in the tar sands. Despite the potential for volatility in commodity prices, even higher extraction costs or serious political intervention on climate change, the tar sands may continue to expand, a furrow that requiring we dig ourselves deeper and deeper into a climate hole.

The mechanisms are various. Canada’s history of staples-based resource extraction lays the foundation. Expanding infrastructure and expanding extraction reinforce each other: “if we have the pipes, we might as well fill them!” The existence of vocal lobby increases the chance that the now almost $1 billion in direct subsidies, low royalties and significant externalized costs remain absorbed by society at large and encourages further growth of the industry. High profit expectations (until 2009, operating profit as a percentage of sales was significantly higher in the resource sector than in other sectors of the Canadian economy) and an insular boom town mentality also contribute. (more…)

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The outsize (un)importance of the tarsands

It’s easy to overestimate the importance of the tar sands to the Canadian economy. Tar sands and their pipelines are after all hailed by the ruling Conservatives, sections of the business press and the ever-present oil lobby as this young century’s “nation-building” project. Yet, a survey recently making the rounds highlights the relative unimportance of the tar sands to Canada’s overall economy: while most Canadians overestimate the importance of the tar sands and 41% are guess that the tar sands account for 12 %to 48% of Canada’s GDP, the reality is that they directly contribute a mere 2% to our domestic output.
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