October 1, 2012
Canada’s energy future is assured, right? Think again (Part 1)
ALEX CARRICK
Chief Economist, CanaData
Most Canadians know that, thanks to the Athabasca Oil Sands in Alberta, we have the second largest reserves of crude in the world after Saudi Arabia.
We’re self-sufficient in both oil and natural gas and exports of the latter to the U.S. have historically driven the Alberta economy even more than exports of the former.
Compared to almost all other developed countries, we’re in an enviable position.
The future looks even rosier, right?
Not so fast. There are forces at work making our energy sector less than the sure bet it once was.
That’s the problem with expectations. They may become less flexible, but economies are always in flux. Life evolves and circumstances change.
Let’s look at the points of contention for our energy sector.
Our oil is more expensive to produce than Middle Eastern oil. We’re no longer just drilling holes in the ground, expecting a gusher.
For our new production, we’re primarily employing steam assisted gravity drainage (SAGD). Or we’re delving into the waters off the coast of Newfoundland, Nova Scotia or (potentially) the high Arctic.
The cost of producing such oil raises the break-even point to perhaps $60 to $80 per barrel. With West Texas Intermediate selling at $100, that’s not a problem.
Emerging world demand will likely keep the price high and geopolitical tensions in the Arab world will continue to add a $10 to $20 per barrel risk premium.
At a selling price of $100 per barrel, our oil companies can make money, but not an inordinate amount. Still, there’s no impediment on that score.
But consider the environmental objections. “Green” advocates say that heavy oil sites scar the land. Watersheds become tainted. And pipelines leak. It’s supposedly a no brainer.
Should that halt development?
The energy companies have very publicly stated their commitment to act responsibly. They’re putting tremendous efforts into property stewardship and reclamation activities.
Their contributions from an economic standpoint extend well beyond employment in construction and production.
Their royalties help pay for social programs and for infrastructure that serves the wider community.
Some of the best careers for our young people will lie in researching and monitoring how best to extract resources with minimal environmental impact.
There are doors of opportunity that are opening up for our native populations. Jobs in mega-project construction are the way to break free from government dependency for many aboriginals.
A case can also be made that, whether we’re actively conscious of it or not, we’ve been living with existing oil projects and pipelines for many years; and with tankers plying both coasts.
These activities have provided essential boosts to our economic well-being.
Advances in materials and monitoring systems are making new projects safer than ones built decades ago.
For example, how much better would it be to have oil or gas delivered in a new pipeline where non-corroding materials minimize problems with rust?
The system isn’t perfect. The energy companies know this.
In the new world of full accountability, in which the backlash from social media can be vicious, they want to avoid public relations disasters at all costs.
BP’s initial public reactions to its problems in the Gulf of Mexico serve as the template for what not to do. The ensuing financial penalties and lawsuits have carried enduring consequences.
The New Democratic Party has traditionally been a strong advocate for the environment. No one’s quarreling with that approach. The problem comes when the party’s leader, Thomas Mulcair, pushes the envelope into the economic realm.
Although he has since backtracked, earlier this year he postulated that heavy oil development in Alberta helps promote a Canadian version of the Dutch disease. The latter requires some explanation.
When North Sea oil was first discovered, Dutch oil wells brought in so much money that the value of the nation’s currency skyrocketed. In turn, this hurt the export-dependent manufacturing sector of the economy.
Mr. Mulcair, and Ontario’s Premier Dalton McGuinty for that matter, have both used the Dutch-disease analogy at times to gain some traction with their constituencies — unions and manufacturers respectively.
The Canadian dollar has, to a degree, become a petro-currency, with its value moving in tandem with some commodity prices, especially oil.
Segments of manufacturing lose export opportunities when the loonie rises. Others pick up domestic sales opportunities from energy project go-aheads. Plus there are the wider-ranging benefits that arise from greater construction employment and a stronger tax base in the resource provinces.
The spillover benefits to the rest of Canada from our oil and gas sectors are unmistakable and should not be taken for granted.
To be continued in Economy at a Glance, Vol. 8, Issue 115.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com
