[FYI - these two articles appear side by side in the 2 September 2008
edition of the National Post, pg. A15, "First of a Series"]
The oil sands that bind
As concern about the future of oil mounts, the Post looks at the
world's most-talked-about commodity. Today, Adam Waterous explains how
the oil sands strengthen Confederation and Donald Boudreaux explains
why running out of oil is a virtual economic impossibility
Adam Waterous, National Post Published: Tuesday, September 02, 2008
http://www.nationalpost.com/news/story.html?id=760790
A significant portion of recent media coverage on the Alberta oil
sands has centered on two themes: the rise of the Canadian dollar tied
to increasing oil prices and environmental issues.
However, there is another side of oil sands development that has not
received as much attention, but has the potential to provide a lasting
benefit to Canadians: the way oil sands strengthening the bonds of
Confederation. Direct benefits include an increase in job creation and
Gross Domestic Product (GDP) -- not just in Alberta, but right across
the country --and greater transfer payments from Alberta.
Our oil sands are an important strategic asset for all Canadians. We
have the advantage of being a resource-rich country in an increasingly
resource-short world. Our nation has a wealth of sought-after
commodities, such as uranium, potash, iron ore, natural gas, hydro-
electricity and, notably, oil, given Alberta's massive oil sands
reserves. Canada boasts the world's second largest oil reserves at 179
billion barrels -- second only to Saudi Arabia's 264 billion barrels.
Of Canada's total proven and recoverable reserves, 97% are found in
Alberta's oil sands. And, while efforts are escalating to build up
renewable power sources, the world will remain heavily dependent on
fossil fuels for the next few decades. In its 2007 World Energy
Outlook, the International Energy Agency concluded that most of the
anticipated increase in non-OPEC production after 2015 would be from
non-conventional sources, mainly Canadian oil sands.
Currently, energy export receipts are sustaining Canada's positive
merchandise trade balance. Our current and potential oil production is
supporting the Canadian dollar, but there are other factors behind our
dollar's rise, including low inflation and substantial fiscal repair.
The strength of our dollar when central Canada's manufacturing sector
is already grappling with a stumbling U. S. economy, intense overseas
competition and high oil prices, is certainly difficult.
Yet potential adjustments for Ontario's and Quebec's manufacturers,
such as exploring new global markets and increased investment to
become more productive and energy-efficient, will be easier to
accomplish when the Canadian economy is in forward gear. Massive oil
sands investments, estimated by the Alberta government in April at
close to $170-billion within the next decade, will be key to national
growth. A stronger Canadian dollar offers consumers and business
increased purchasing power in the global marketplace and highlights
Canada as a stable theatre for investment. Just as employee turnover
is typically lower at highly profitable companies compared to poorly
performing enterprises, low unemployment and a rising currency should
give Canadians confidence in their country.
The economic impact of the oil sands stretches across Canada. A study
in October, 2005, by the Canadian Energy Research Institute estimated
that of the total increase in GDP from development and production
activities, 89% remained in Canada. Within that 89% share, Ontario's
portion was 11%, Quebec's 1%.
In terms of employment generated, 83% remained within Canada, with 16%
in Ontario and 2% in Quebec (not to mention the opportunities for many
Quebec workers who have chosen to move to Alberta). Moreover, their
calculations indicated that the federal government claimed 41% of
total revenues, and Alberta 36%. Money can, in part, be the glue that
helps keep a country together.
And Alberta is a major contributor to our federation. The latest data
available, for 2005, indicate that Alberta contributed $30-billion to
federal coffers and received $17-billion back in federal expenditures,
resulting in a $13-billion net contribution. Though
Ontario's net contribution in 2005 was larger, at nearly $21-billion,
on a per capita basis each Albertan's net contribution was almost
$4,000, compared with just less than $1,700 from each Ontario
resident. Moreover, Alberta's net contribution has climbed steadily,
rising from just $500 per capita in 1995. As economic power has become
more dispersed in Canada, Albertans have contributed to strengthening
the federal transfer system.
This rise in Alberta's financial strength should improve Canadian
unity because dispersing economic power in large countries can
increase political stability. Up until the rise of the oil sands, for
the entire history of Canada, two provinces dominated not only the
political, but also economic agenda of the country.
Far flung unions or federations that are dominated by relatively small
geographic centres have failed for centuries. Just look at the Roman
Empire, the British Empire and the Soviet Union (although Canada's
political institutions are dramatically different). Frequently, the
outlying regions rebel over time against the economic and political
centres.
Conversely, the United States has enjoyed tremendous national unity in
part because of its geographically diverse economic power. The U. S.
has four corners of economic power (New York, east; California, west;
Illinois, north and Texas, south). The top 10 Fortune 500 companies
ranked from largest to smallest, are located in Arkansas, Texas,
California, Michigan, Texas, Connecticut, Michigan, New York, West
Virginia and Texas.
In Canada, the economic migration over the last decade from east to
west, driven largely by the oil sands, has been breathtaking. Assuming
BCE is privatized, for the first time in history, more than 50% of the
equity value of the Toronto Stock Exchange will be headquartered in
the west.
If you type in "Alberta Oil Sands Environment" on Google, about
700,000 items appear, with eight of the first ten focusing on the
project's negative potential impact on the environment. However, in
recent years, environmental concerns have prompted significant
progress, with policies restricting water use, recycling waste
materials and capping toxic emissions. With respect to the oil sands'
impact on the native landscape, oil sands leases are being reclaimed
with ultimately the vast majority of the land returned to native
vegetation. According to Rick George, CEO of Suncor, the oil sands
have removed only 0.01% of Canada's boreal forest.
Without a doubt, developing the oil sands in a low carbon environment
will be challenging. Alberta's Climate Change Plan recognizes that its
GHG emissions will rise in the near-term with the increase in oil
sands production planned. To minimize this increase, Alberta, as of
mid-2007, requires its largest emitters to reduce their GHG emissions
intensity by 12%, or if this is not possible, to purchase credits in
Alberta-based environment offset projects or contribute to the
Province's Climate Change and Emissions Management Fund. Longer-term,
a variety of solutions to reduce the oil sands' carbon footprint are
being pursued. Most notable are the efforts to develop carbon capture
and sequestration on a feasible, commercial scale with the support of
all levels of government and industry. In fact, CCS, as it is known,
may eventually prove to be another area of global leadership for Canada.
Yes, challenges remain on the development of the oil sands. But it is
important to keep these challenges in perspective. Alberta's
burgeoning oil sands industry is a driving force in the Canadian
economy, key to our nation's future. The oil sands are an incredible
gift, not only to Alberta, but for all of Canada. - Adam Waterous is
vice chairman & president of Scotia Waterous.
[...]
We'll never run out
Donald J. Boudreaux, National Post Published: Tuesday, September 02,
2008
http://www.nationalpost.com/news/story.html?id=760789
Are we running out of oil? The question seems silly. "Yes" is the
obvious answer.
Or is it?
That there is less oil in the ground today than there was yesterday is
true. That there was less oil in the ground yesterday than there was
in 1870 is also true. But "running out of oil" is not as much a
question of physics as it is one of economics. And economics assures
us that we will never run out of oil.
My colleague Russ Roberts explains why in his book The Invisible
Heart. Imagine, Russ says, a room full of pistachio nuts. You love
pistachios and can eat all that you wish as long as you throw each
empty shell back into the room whenever you eat a nut. You might
suppose that you'll eventually devour all of the nuts in the room.
Their number, after all, is finite.
But some thought reveals this conclusion to be, well, nutty. At the
start it's easy to find pistachio shells containing nuts. The more you
eat, though, the more difficult it becomes to find uneaten nuts among
the increasing number of empty shells. Eventually, it will not be
worth the time and effort required to search amidst the empty shells
for the relatively few remaining nuts. You'll voluntarily leave
uneaten pistachios in the room.
And so it is with oil. As we continue using oil, getting more of it
becomes increasingly difficult. This increasing difficulty of finding
and extracting oil is reflected in its higher price -- a phenomenon
that prompts consumers to consume oil more carefully and prompts
producers to explore for alternatives.
Of course, advances in technology often render reality richer than
this simple story. For example, if a new, lower-cost technique for
extracting oil is invented, then oil that yesterday was too costly to
get might today be profitably extracted and sold. It's highly
doubtful, though, that the cost of extracting oil will ever fall so
low -- or that the demand for it will ever rise so high -- that we
will find it worthwhile to extract literally the Earth's last barrel
of petroleum.
The economic limits on the supply of oil clearly differ from its
physical limits.
Even oil's physical limits, though, are unknown. Because exploring for
oil is very costly, no one has incentives to search for more than a
few years' worth of supplies. Just as you don't stock your pantry with
more than a few weeks worth of food -- just as you go to the
supermarket only when your existing food supplies run low -- oil
companies sensibly explore only for enough oil to satisfy their
expected needs over the next few years.
Also, just as it would be absurd to estimate your household's lifetime
supply of food based only upon the stock in your pantry, it's absurd
to estimate the world's long-term supply of oil based only upon
today's proven reserves of that resource. There simply is no good way
to know how much oil exists in the Earth beyond the always-limited
amounts that oil producers have proven to exist through their
economically constrained explorations.
Nevertheless, doesn't physics tell us that this amount is limited? Yes
-- but physics cannot tell us the economic relevance of this fact.
Consider two scenarios. Scenario One: You're a mosquito on the surface
of a balloon containing as much blood as an Olympic-size swimming pool
contains water. You, hungry mosquito that you are, inject your
proboscis into the balloon and enjoy a meal. By doing so you
negligibly reduce the volume of blood in the balloon. Whether you know
it or not, you can gorge yourself on blood from this balloon for the
rest of your life and there will still be ample blood remaining to
feed countless generations of your offspring.
Scenario Two: You're a mosquito on a balloon the size of a pea. You
eat a meal. The size of your meal relative to the blood-contents of
the tiny balloon is large; you significantly reduce the contents.
I don't know if our relationship to oil is like that of the mosquito
in scenario one, but
I'm confident that it's not like that of the mosquito in scenario two.
Perhaps we're in some intermediate scenario -- say, like a mosquito on
a blood-filled balloon the size of a large beach ball.
Point is, we could be like the mosquito in scenario one. That mosquito
needn't know that she's atop a quantity of blood that's practically
limitless. If she's informed that the amount of blood in her balloon
is finite, she might needlessly worry that she'll run out of blood.
She might pointlessly reduce her consumption to avoid a mythical "end
of blood."
Again, I don't know that we're like the mosquito in scenario one --
but no one knows that we're not. A resource physically finite might be
economically inexhaustible.
-Donald J. Boudreaux is professor of economics at George Mason
University.
