Fossil Policies

In a world ever thirstier for oil, Canada’s approach to energy development needs fundamental rethinking

Despite Prime Minister Stephen Harper’s claim that Canada is an energy superpower, our national debate over energy policy has been remarkably feeble, too often resembling a simple morality play of greens against the oil industry or a grudge match between East and West. Canada, like other countries, must move to a greener energy policy, but our unique challenge is to do so while coming to terms with the opportunities and risks of the oil sands—our globally significant resource. The issues go well beyond the environmental to include some basic questions regarding Canada’s fiscal arrangements and economic policies. Our national unity will depend on achieving a measure of consensus on these issues, which will not be easy. However, the speed of development of the oil sands makes a serious national debate urgent.

The books under review can help frame our debate. Vaclav Smil’s Energy Myths and Realities: Bringing Science to the Energy Policy Debate and Energy Transitions: History, Requirements, Prospects and Daniel Yergin’s The Quest: Energy, Security and the Remaking of the Modern World provide deeply knowledgeable expositions of the key drivers of energy policy around the world. Yergin is especially strong on the politics, while Smil focuses on basic properties of energy systems and the evaluation of technological possibilities. Catching a Rising Tide: A Western Energy Vision for Canada, Sheila O’Brien and Shawna Ritchie’s glossy coffee-table presentation, is very thin on analysis, but is important in giving voice to Western Canadian leaders calling for a national framework for energy policy. None of these books drills down into Canada’s special fiscal and economic challenges, but they set out important realities and constraints, and point toward potential objectives.

Daniel Yergin is arguably the top energy guru in the United States, a Pulitzer Prize winner for his monumental history of the oil industry, The Prize, and the hustling founder of a top energy consultancy and advisor to the powerful. (Disclosure: He blurbed Oil and Gas in Federal Systems, which I edited and which will be published by Oxford University Press in June.) He is a born storyteller and something of a romantic, who cannot hide his love of the oil business. Vaclav Smil is a hard-eyed, Mitteleuropean polymath, declared a top global thinker by Foreign Policy. Bill Gates is a fan and reviews Smil’s books on his blog, perhaps qualifying Smil as the supernerd’s nerd. A professor in Manitoba, he is something of a prophet without honour in his own land.

Yergin tells a sprawling story of the changes in the energy business and policies since 1990. Fully half of his book is on the “new world of oil” and natural gas, making it effectively a sequel to The Prize, while the second half discusses the rapidly shifting world of alternate energies. Smil, by contrast, is sharply analytical, with no time for storytelling, assessing the potential of different sources of energy. His penetrating reflections on why the transition from fossil fuels to renewables will be slow are largely echoed by Yergin.

Smil and Yergin are dismissive of the “peak oil” fraternity, which sees physical shortages forcing a transition off oil. Yergin enthuses about the “game changing” potential of natural gas as a lower carbon and increasingly affordable “fuel of the future,” given the breakthrough in fracking shale gas. Unfortunately, he skates lightly over issues such as the possible pollution of subsurface and surface water, as well as the leakage of greenhouse gases into the ­atmosphere.

Yergin largely ignores the recent disturbing shift toward coal’s rising share in global primary energy supply, driven by Chinese and Indian demand, and Smil uncharacteristically neglects to factor in coal in describing an accelerating de-carbonization of global energy supply (although he elsewhere provides sobering analyses of China’s continuing heavy dependence on coal, of the poor prospects for greater efficiency in coal-burning power plants and of the remote likelihood of carbon sequestration making a contribution “on a scale sufficient to affect the earth’s climate”).

Of the non-fossil sources of energy, both authors would like more nuclear, although they fear its hyped renaissance is unlikely. They see wind as the most mature renewable energy, moving toward a significant, but limited, place (perhaps 15 percent by 2030 or 2040, says Smil). Smil argues that electric vehicles will achieve no net saving in primary energy demand because they still need to be powered. He is largely dismissive of biofuels, and especially crop-derived ethanol, whose costs “greatly outweigh the benefits.” Smil emphasizes the large spatial demands associated with the low energy density of most renewable sources of energy, which will limit their deployment. Longer term, he believes the most potent renewable energy source will be mass-scale photovoltaic generation, but the timing is very uncertain given the technical challenges. Smil’s gloomy assessment of a fully renewables-based energy economy leads him to emphasize the need to prioritize energy efficiency (for which the prospects are good) but also, more challengingly, to reduce energy consumption, whatever its source.

Yergin provides a virtual primer on how politics have shaped energy policy, particularly in the U.S., which combines a preoccupation with energy security and potent lobbies for short-term interests. Both he and Smil criticize the political failure to factor negative environmental effects into energy (not just fossil fuel) prices. While governments can drive rapid energy transitions in specific cases (such as France’s move to nuclear after the 1973 oil shock), there are technical, as well as political, limits to this. Smil eviscerates Al Gore’s simplistic views on revolutionizing our energy systems.

In sum, Yergin and Smil see fossil fuels remaining the dominant source of primary energy for the coming decades, yielding their place only slowly to renewables. This is consistent with the scenarios of the International Energy Agency. Both its “business as usual” policy and its more aggressive “new energy” policy predict rising demand for fossil fuels, including oil. Only in the “intensive” policies case does the demand for primary energy and oil drop—but the likelihood of such intensive policies is slight.

The world’s continuing appetite for oil goes to the heart of Catching a Rising Tide. The book, produced by the Calgary-based Canada West Foundation, weaves together the sometimes conflicting perspectives on Canada’s energy policy of 50 leaders, almost all from the West. Its central preoccupation is not the transformation of our energy system, but the desire “to maximize Canada’s potential as a major global energy producer.” It sees an urgent need for a national vision on energy if this is to happen.

The vision proposed is that “Canada will be a supplier of choice of energy products, services and expertise to the world for the benefit of all Canadians. We will have an exceptional environmental and social record, which will continue to define our values as a nation and give us a stronger voice on the international stage.” While the authors recount Canada’s comparative riches in uranium, hydro, coal, natural gas and conventional oil, it is “The Mega World of the Oil Sands” that excites them.

The scale of this mega world is captured in a quote by Ed Whittingham of the Pembina Institute, who points out that oil sands production was 1.5 million barrels a day in 2009 and that proposals in the regulatory pipeline would bring that to 6 million. (Canada currently produces more than 3 million barrels a day of oil of all kinds.) Projections of the Canadian Association of Petroleum Producers and the U.S. Energy Information Administration are similar, although views differ on timing. The 6 million barrels from the oil sands (plus conventional production of 1 to 2 million barrels) could be reached by 2025 if growth continues at 10 percent a year.

This has major implications for the Canadian economy. The oil and gas sector has typically been around 3 percent of gross domestic product, but this could easily double or even triple in higher price scenarios. Oil and gas accounted for as little as 6 percent of annual exports in the last two decades, but have risen above 20 percent more recently. Canada’s oil consumption is relatively flat (and may decline) so virtually all of our increased oil production will be sold abroad, perhaps rising to half or more of our exports. (Gas exports are not particularly robust, given U.S. oversupply; the main hope is liquid natural gas markets in Asia.)

Catching a Rising Tide is preoccupied with how to permit this growth: the infrastructure and arrangements for oil exports (hence the strategic importance of the Keystone and West Coast pipeline projects), as well as the more general need to secure the industry’s “social license to operate” (including a transformed relationship with aboriginal peoples). The authors (and most interviewees) recognize that “we need to clean up our environmental record so that we can walk into any international forum with a stronger voice and a clear environmental conscience.” This requires a credible climate change policy (the authors cite British Columbia’s carbon tax as successful and publicly supported) that should be national and touch all sectors. More difficult, but not impossible, will be the environmental story of the oil sands. The Pembina Institute has done excellent work on local environmental issues, where there is a need for a regional plan dealing with cumulative impacts, tailings management, monitoring and water withdrawals from the Athabasca River. As for climate change, a strengthened policy need not endanger the oil sands, which result in about 5 to 15 percent more in carbon dioxide emissions on a wells-to-wheels basis than conventional oil sold in the U.S.—significant, but less than their image would suggest; however, the current huge government and industry investment in carbon sequestration as the way to address the carbon challenge may prove misguided, if Smil is to be believed.

While O’Brien and Ritchie recognize the huge disparities in energy resources among provinces and the need to ensure that “the prosperity from energy resources is transformed into prosperity for the country,” they are exceedingly cautious about how to address this. They cite the “mechanisms currently in place that are designed to equalize the imbalances of natural resource distribution nationally, such as federal equalization payments” and underline that “the owners of the national [sic] resources are the people of the provinces in which they are found, therefore those owners must decide how the money derived from those resources should be spent.”

In fact, equalization does not “equalize the imbalances of natural resource distribution” in any significant way. Its current design provides a finite pool of funds growing at the rate of GDP to be shared among the poorer provinces. The federal government is constrained in its access to resource revenues to fund this pool (and for its finances generally). This design provides 18 percent less in 2012 than the old system based on a national standard and former Bank of Canada governor David Dodge calculates that this shortfall could rise to 24 percent in 2020. Dodge projects fiscal capacities for Alberta, Newfoundland and Saskatchewan that are substantially higher by 2020 than those of other provinces – ranging from 80 percent for Alberta to 35 percent for Saskatchewan. These numbers could understate the Alberta case if the oil sands expansion continues its rapid pace and represent a far greater disparity than the 10 or 15 percent advantage of richer provinces in past periods.

In other words, equalization has become less generous to the poorer provinces at a time when the resource-rich provinces are enjoying an unprecedented comparative advantage. Dodge fears that such disparities “jeopardize the sustainability of the current system.” Major fiscal disparities among states within federations can induce migration of investment and labour that does not reflect underlying economic factors and so reduces the efficiency of the larger economy.

A booming resource sector also raises the spectre of “Dutch disease,” whereby resource activities drive up the exchange rate (or cause it to fluctuate widely), thus undercutting the competitiveness of other trade-exposed economic sectors. There is room to debate how far we are down this road—certainly other factors have been important in our manufacturing sector’s decline—but the phenomenon has been real in several countries. Unfortunately, none of the books under review give it more than a passing reference.

The country that is thought best to have dealt with this challenge is little Norway, the world’s third largest exporter of energy, which the IEA has described as having “a unique twin role as a major oil and gas producer and a strong global advocate of climate change mitigation.” O’Brien and Ritchie refer to Norway’s sovereign wealth fund, currently around $600 billion, but show little understanding of its full significance. The International Monetary Fund has cited it as exemplary because it serves as a savings fund for the intergenerational transfer of wealth, it limits current government spending to the interest on the capital and it is exclusively invested abroad, which has minimized overheating the economy and upward pressure on the currency.

Canada can learn from Norway and others, but will need to develop solutions that fit our circumstances. These may vary by province: for example, Newfoundland has already produced over half of its expected eventual recovery of offshore oil and should think urgently about a savings fund. Alberta has been enhancing its net assets (not always through the Heritage Fund), but the vast scale of the oil sands means planning for their end is less a concern than other challenges.

There are signs that the oil patch and Alberta government are aware of the need to shift the paradigm. At one level both are trying to persuade the rest of the country that it will benefit from oil sands development, but this is proving a tough sell. A recent Canadian Energy Research Institute study found that direct spending remains overwhelmingly in Alberta with less than 4 percent going to Ontario (and even less to all other provinces combined).

What is increasingly clear is that all parts of the country have an interest in a new, focused dialogue on a national framework for energy policy, taking full account of the tremendous implications of the oil sands. The issue will not be whether to develop the oil sands, but how, how fast and in what broader policy context. This may require a dramatic rethinking of energy policy in a way that includes the environmental, fiscal, exchange rate and other economic dimensions.

It is a comment on Canada that it has always been easier to develop a national consensus on oil and gas policy when times have been tough or prices low. The federal government supported building national oil and gas infrastructure, creating a market for Alberta’s shut-in oil during the early 1960s, and taking tax initiatives to promote oil sands development in the 1990s. Today we have a federal government strong in the West, which should make it easier to lead the debate when the oil patch is booming. The Canada West Foundation’s contribution suggests the time is ripe. All players are going to need to have an enlightened view of their interests with a view to creating a sense of national purpose. We’ll see then if we can catch the rising tide.

[Correction: This text is updated from the print version, which read “Dodge projects fiscal capacities for Alberta, Newfoundland and Saskatchewan that are up to 35 percent higher by 2020 than those of other provinces”.]