This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org
This article is from the January/February 2013 issue of Dollars & Sense magazine.
at a 30% discount.
A Nightmare on Maple Street
Prime Minister Stephen Harper struggles to slay the specters haunting Canada’s oil sands.
Canada now has “one of the most sought-after comodities,” says the Globe and Mail. It’s a thick, dark fluid on which the Conservative government is betting the country’s future.
No, it’s not maple syrup, nor is it coffee from Tim Hortons (Canada’s answer to Dunkin’ Donuts). Rather, the coveted Canadian commodity is crude oil, and exporting increasingly large amounts has become Prime Minister Stephen Harper’s top priority. A quarter of Canada’s merchandise trade—double the percentage in 2000—is now tied to energy exports, mostly from the oil sands in northern Alberta. Canada’s annual production from the oil sands is expected to nearly triple—from just over 400 million barrels in 2006 to nearly 1.2 billion barrels by 2020.
At the current average annual growth rate of 7.1%, the oil sands will account for 80% of total Canadian oil production in 2025 (compared to a little more than half in 2010). “No other country in the world is bringing on [energy] infrastructure projects at the pace and relative scale as Canada,” crowed former Conservative environment minister Jim Prentice last year.
The oil sands certainly stand to add dramatically to world oil supply. “Given how significant a portion the oil sands make up of currently accessible reserves,” notes AltaCorp Capital, “it is hard to envision any meaningful growth in global oil output without significant development of the oil sands.” The International Energy Association (IEA) has also recently predicted that “an energy-thirsty world will need ‘every drop’ of growing production in Canada’s oil sands.”
The appeal of Canadian crude, however, is also due in large part to the shrinking number of reserves open to investors. Of the 16% of the world’s remaining oil reserves that are not state-owned or controlled, well over half reside in Canada’s tar patch.
Canada is a “rare beast” in the world, as the Wall Street Journal puts it: “an oil-rich nation where the state [doesn’t] confiscate your oil fields.” And supermajors, like ExxonMobil, find Alberta’s bitumen particularly appealing: oil-sands holdings can be used to inflate reserve numbers, boosting stock prices.
But there’s another reason the oil sands have become such a magnet for investors: in 2011 the rate of return on investments was 20 to 30%, compared to 15% two years earlier. The profit-making opportunities have been enhanced as a result of a generous royalty regime, a series of corporate tax cuts, and a recent regulatory overhaul to speed approvals of large energy projects. All of these measures have made Canada among the top five most “economically free” countries in the world—well ahead of the United States—according to Canada’s free-market think tank, the Fraser Institute. Envious of Canada’s “freedom,” the American Institute for Energy Research has advised U.S. politicians to take their cues from “our northern neighbor, [which is] cutting energy taxes/regulation.”
Already, over $100 billion has poured into the oil sands over the past decade; another $364 billion is anticipated between 2012 and 2035. Investors far and wide are all hoping to “make hay while the sun shines,” as one Canadian energy executive advised not so long ago.
Unfortunately, the sunlight may not be shining for much longer. In fact, the sun may soon be setting on Maple Street, where a series of positively nightmarish scenarios loom on the horizon.
First, foreign money pouring into the oil sector has pushed up the value of the Canadian dollar, with predictably dire consequences for Canada’s manufactured exports. That’s right: the dreaded Dutch disease (economists’ diagnosis when a sharp inflow of foreign capital in the resource sector results in an overvalued currency, rendering exports uncompetitive and hollowing out the manufacturing sector). Canada has all the telltale symptoms: oil has swapped places with cars, and factories are being shuttered in Ontario, Canada’s industrial heartland. “For every natural resource job that’s been added in Canada since the end of 2007,” Bloomberg notes, “more than 15 factory jobs have been lost.”
A related, albeit less serious, ailment is battered-collective-ego syndrome, the result of our government’s shamefully thuggish behavior during international climate summits. The precipitous fall from grace was captured by Guardian columnist George Monbiot’s caustic comment in Copenhagen: “Until now I believed that the nation which has done most to sabotage a new climate change agreement was the United States. I was wrong. The real villain is Canada.”
How bad is our international reputation? Well, since Canada withdrew from Kyoto—the only signatory to have done so—Canadian travelers abroad have been covering the maple leafs on their backpacks with American flags.
Is That a Carbon Bomb in Your Backyard?
Desperate to shed its bad-boy image and restore our national pride, Ottawa has been trying to bury any climate concerns in an avalanche of enthusiasm about the projected windfall. The oil sands, according to industry figures, will contribute $885 billion to the economy over a 20-year period, with $123 billion in royalty and tax revenues for Canada’s federal and provincial governments.
But the benefits are not only monetary. The nation’s “beating heart, ” as former Liberal leader Michael Ignatieff called the oil sands, will also supply the lifeblood of national unity, ensure both national and continental energy security, bolster Canada’s productivity and competitiveness, sustain our social programs, stimulate innovation, lead the transition to a “green” future, and turn the country into a global energy powerhouse. Oh, and since our crude is more “ethical ” than “conflict oil” (“whose revenues fund terrorism” in the Arab world, according to our environment minister), Canadian motorists will get to feel morally smug when they fill up at the pump.
Unfortunately for Ottawa, it’s not the image of a “beating heart” that comes to mind when the public thinks of the oil sands. Instead, more and more Canadians are waking up to the realization that they may be sitting on the biggest “carbon bomb ” on the continent. “By some calculations,” environmental activist Bill McKibben writes, “the tar sands contain the equivalent of about 200 parts per million CO2—or roughly half the current atmospheric concentration. Put another way, if we burn it, there’s no way we can control climate change.” Burning the oil sands would be “game over for the planet,” adds Jim Hansen, head of the NASA Goddard Institute for Space Studies.
Ottawa’s attempts to defuse the carbon bomb with carbon bombast, in short, are not working. The hydrocarbon hubris is only hardening Canada’s reputation as an uncaring climate miscreant.
Mermaids, Avatars, and Other Terrorists
Worse yet, the din from anti-oil sands protesters has been getting so loud it’s drowning out Ottawa’s paeans to pipelines. And recent victories by environmentalists have “embolden[ed] those opposed to ... other new project developments,” as Pat Daniel, president and CEO of Enbridge, has reluctantly admitted. This brings us to the most ominous scenario unfolding on Maple Street: the increasing difficulty of getting our crude to market.
This potential horror has officials in Ottawa scurrying for more effective ways to neutralize the fossil foes standing in the way of Canada’s energy export markets. All have now agreed to ditch the risible campaign to claim the moral high-octane ground and instead to start playing hardball with anyone who fails to genuflect at the altar of Big Oil.
The new bullying has become so reflexive in Ottawa that when Foreign Affairs and International Trade recently announced it would be looking for martial-arts instructors to train its envoys to handle confrontations in “potentially dangerous situations, ” some immediately suspected the department had the next climate change talks in mind.
While officials haven’t actually begun to engage in fisticuffs with opponents, they have been trying out a few wrestling moves, like the stranglehold. Among the victims are some of Big Oil’s most feared adversaries—climate scientists. And the grip has been tightening: scientists working for the federal government can no longer speak freely to the press about their findings, especially those that contradict Ottawa’s official oil sands narrative. From wildlife to water quality, any scientific finding implicating the oil sands must first be vetted by members of the prime minister’s communications staff, who occasionally relax the chokehold and allow scientists to read carefully scripted media lies, er, “media lines.” When the finding is too “controversial,” scientists are required to recite the following: “I’m not in a position to answer that question, but I’d be happy to refer you to an appropriate spokesperson.”
In the old Soviet Union, we called the practice censorship; in Canada it’s called oil sands “messaging.” The intent is the same—to prevent the public from getting overly alarmed about, say, the increased levels of cancer-causing contaminants in lakes surrounding the tar patch.
Ottawa has been heavy-handed with other, equally menacing figures, like Daryl Hannah, the star of the 1984 mermaid hit Splash, and environmentalist Bill McKibben. Both have been raising awareness of the potential environmental damage caused by the proposed Keystone XL pipeline.
In retaliation, the feds initially considered pulling all of Hannah’s films from video stores across Canada (except for Kill Bill). But the scheme was unworkable, so they decided instead to create a counterterrorism unit (or so-called “Integrated National Security Enforcement Team”) to keep a close eye on environmentalists (now listed alongside white supremacists as threats to national security). Some, apparently, have even proposed waterboarding Hannah if she shows up on this side of the border ... though questions are being raised about the effectiveness of the torture on mermaids.
Joining Hannah in Ottawa’s bad books is Hollywood director James Cameron, who was recruited by oil executives as a potential ally. They had hoped a tour of the oil sands would inspire the director to use his cinematographic wizardry to transform toxic-tailings ponds into azure lakes rimmed by verdant fields. Perhaps a sequel to his recent science-fiction blockbuster? To their great disappointment, though, when he visited the future site of Avatar-sands, the title that actually came to mind was Emission Impossible. Cameron, who had already called the oil sands a “black eye” for Canada, declared himself “appalled” by the “devastation” when he saw it firsthand.
The director is reportedly being fitted for an orange jumpsuit somewhere in the southeastern end of Cuba.
Even the Big Banana Splits
Ottawa is also going after “enemies” in the corporate world: the self-described socially responsible corporations that have been proudly publicizing their efforts to achieve “carbon-neutral” growth or use “low carbon fuels” in their operations. Several are Fortune 500 companies, like Whole Foods Market, Bed Bath and Beyond, Avon, The Gap (including subsidiaries Old Navy and Banana Republic), and Walgreens, all of which have signed on to an anti-oil sands campaign organized by ForestEthics.
To prevent further corporate exposure to “misinformation,” Harper has dispatched officials to “engage with” all the Fortune 500 companies. First on the list is Chiquita Brands, which has also snubbed the oil sands. Perhaps impressed by the company’s use of paramilitaries to deal with opponents in Colombia (see Patricia Rodriguez, “The Economics and Politics of Depropriation in the Other Colombia,” Dollars & Sense, November/December 2010), Canadian officials are thinking of recruiting an elite squad to lean on other companies contemplating a boycott.
Then there are the growing ranks of institutional investors concerned over the long-term performance of companies operating in the oil sands. An international group of 49 ethical funds with investments in Alberta’s oil sands has expressed concern that the environmental and social impacts of the oil sands may threaten its “long-term viability as an investment.” When told that oil-sands crude had already been certified as “ethical” by Ottawa, the investment managers reportedly guffawed in unison.
The laughter abruptly stopped when they received a visit from a few gentlemen in camouflage fatigues.
Et Tu, Butte?
First there was Butte, Montana, where some of the earliest protests by environmentalists and landowners to stop the Keystone XL pipeline took place. Now there’s Mountrail County, in the neighboring state of North Dakota, where extraction from the “Bakken play ” oil deposit is centered. It is fast becoming the Canadian oiligarchy’s worst nightmare. Currently, 99% of Canada’s oil exports are destined for the United States, but our most important trading partner could be self-sufficient in energy by 2035, at least according to projections by the IEA. If trends in the United States continue, with domestic supply “continu[ing] to displace Canadian sources,” as the IEA observes, one day our southern neighbor may no longer need Canada’s crude. Gasp!
To make matters worse, a Canadian credit-rating agency recently determined that the Bakken play was a better investment than the Alberta oil sands. And Marathon Oil Corp. has publicly mused about pulling out of the oil sands to pursue the higher profits available in North Dakota.
These troubling developments come on the heels of several previous slights: Obama’s delay of the Keystone XL, and the introduction of low-carbon fuel standards, now implemented or under consideration in fourteen U.S. states. Lorraine Mitchelmore, Royal Dutch Shell PLC’s Canadian president, may have been understating things when she said the U.S. market is “not a given anymore.”
Feeling betrayed and driven to despair, Prime Minister Harper has declared it a “national priority to ensure we have the capacity to export our energy products beyond the United States and specifically to Asia.” Energy expert Daniel Yergin has also advised Canada to pursue the Asian market more vigorously.
Access to Asia, however, is far from a sure thing. Enbridge’s Northern Gateway—the proposed pipeline connecting Alberta to Canada’s west coast (where crude will be put on tankers destined for Asia)—is facing fierce resistance. Invigorated by their victory on Keystone, opposition groups are rallying in unprecedented numbers to stop the Northern Gateway pipeline. Adding to Ottawa’s woes, aboriginal groups, concerned about treaty violations and potential oil spills on native land, are threatening to hold up current pipeline proposals for years in court battles.
As if these problems aren’t bad enough, the existing pipeline network will be bursting at the seams by 2015 unless both the Keystone and Enbridge pipelines are laid, officials warn. Unfortunately, Canada’s prison capacity is as inadequate as its pipeline capacity, making it impossible for the government to jail all the eco-terrorists preventing our crude from accessing other markets.
The Great Stick-y Up
Combined with the boom in shale-oil production in North Dakota, the lack of pipeline capacity is depressing the price of Canadian crude (which is confined to “oversupplied markets,” according to the Globe and Mail). As of mid-December, a barrel of Western Canadian Select fetched only $47.20 (U.S.) a barrel, $40 less than the North American benchmark (West Texas intermediate) and a whopping $62 less than the global benchmark (Brent crude). In fact, oil-sands crude is so far below the market price it is now the cheapest in the world. That’s great for our mostly American buyers, but economists are predicting Canada could forego as much as $1.3 trillion of GDP and $276 billion in taxes (from 2011 to 2035) if the current major pipeline expansion projects do not get built.
Two solutions have been floated to deal with the sleep-depriving scenarios unfolding in Canada. The first is a precision missile strike on oil facilities in North Dakota, which would eliminate the competition responsible for the oil glut and bolster prices for our crude. Why else, many have been wondering, has Ottawa been celebrating the war of 1812 (when we repelled an American invasion) and shopping around for a new fleet of stealth-fighter aircraft, if not to mobilize the nation and prepare for an attack?
Luckily for North Dakota, the plan has been scrapped, since we can’t afford the planes. Besides, someone reminded Prime Minister Harper that the American military has undergone several upgrades since 1812. In any case, alienating one’s largest trading partner is not considered sound economics.
The second solution is a trade embargo that would remove an essential Canadian import from American pantries. Remember our other dark, viscous export, maple syrup? Well Americans probably don’t know it, but Canada is home to the “global strategic maple syrup reserve,” which regulates the supply of about 70% of the world’s maple syrup. The United States is the largest buyer.
Americans may also not know that the embargo is already being put into effect. It started a few months ago when newspapers around the world, including the New York Times, reported the heist of six million pounds of Canadian maple syrup. What the papers didn’t report, though, was that the perpetrators have connections to the prime minister, who has concocted an elaborate maple-syrup-for-oil plot with extortionate intent. His plan is to take enough syrup off the market long enough to push prices sky high. This will drive American pancake eaters IHOP-ping mad and force the nation to accede to his key demand: buy our sticky bitumen at top-dollar prices if you want to buy our sticky syrup at market rates, too. And no waffling on it!
Sadly, the attempt at sweet revenge is expected to be shelved in the coming days: in his haste to hoard the syrup, the prime plotter forgot about that notorious sanction buster, Aunt Jemima. So only a sap would take his threat seriously.
Unless Schemin’ Stephen comes up with a better plan very soon, the oil peddlers on Maple Street can expect many more sleepless nights.