Are the Petro-Pols Setting Canada Up For a Crash?

Michael Ignatieff referred to it as the "beating heart of the Canadian economy in the 21st century."  Prime ministers, Liberal and Conservative alike, have dared to dream of Canada as a global "energy superpower."   Stephen Harper has led the charge as no other, championing high-risk pipeline projects to the American south and British Columbia's pristine northern coast.

The temptation must have been irresistible.  Like latter day Jed Clampett's, they saw "black gold" in massive quantities just lying there for the taking.   Who needs a real economy when they've got such a vast treasure right beneath their feet and Big Oil companies from around the world vying for the rights to extract it?

And so our prime ministers and premiers have done the Petro-dance with Big Oil, settling for minimal royalties, lining the industry's pockets with tax breaks, subsidies and free natural resources, deferring both environmental costs and Canada's 'fair share' of the plunder.   And we've done this based on a conviction that today's world oil prices are solid and they're only going one way, straight up.  After all, it's tomorrow's world oil prices from which we'll reap our share of the bounty.

But what if we've been had?   What if we have deluded ourselves about world oil prices for the rest of this century?   What if we've made an enormous and potentially disastrous bad bet?   What if world oil prices collapse, permanently, instead of soaring?  You see, when it comes to the Tar Sands, there's no way to cover the downside.   That's a bet you can't lay off, not that anyone in Ottawa is even interested - yet.

The warnings are sounding.   Oil assets are "sub prime", as toxic as the overvalued house mortgages that brought America's economy low and sent the world into meltdown in 2008.  If oil assets are sub-prime, our leaders are building Canada's economy on a house of cards just waiting to blow down.  Shit, oh dear.

So what's all this "sub prime" business?   Why should oil reserves ever be worth less than today's world prices?   And what about the notion of "peak oil"?

The viability of world oil assets was quietly dealt a mortal blow a few years ago when teams of researchers began looking into the carbon-carrying capacity of our atmosphere.   They wanted to know how much more CO2 our atmosphere could hold if we were to stay within the 2C safety zone for global warming.   How much CO2 could we put in the air before we risked triggering natural feedback mechanisms, also known as runaway global warming, nature's very own civilization crusher.   These teams, operating independently, came up with surprisingly consistent numbers.   We have, by their calculations, about 565-gigatons of atmospheric CO2 capacity remaining.   565, that's the number.   So, what does that have to do with world oil prices?

Big Oil is big because it holds rights to untapped oil reserves around the world.   These reserves are carried on Big Oil's books as assets.  At today's prices, they're worth trillions.  But those reserves, if extracted and consumed, will generate 2,800 gigatons of CO2.   The "do not exceed" figure is 565.   The oil reserves number is 2,800.  565, 2,800.  So, if we're to attempt to leave a habitable world for our grandkids, we're going to be able to use just one-fifth of those oil reserves.   The other four-fifths are going to have to be left in the ground.   That's the price we'll pay if we want our civilization to survive.

Is this for real?  Yep.  Two weeks ago a group of senior British investment, science and political types sent a warning letter to the governor of the Bank of England.   They said oil reserves are "sub prime" assets and urged the Bank to rein in oil speculation.  Big Oil, they said, had created a "carbon bubble".   And, as Bill McKibbin points out, Big Oil is fighting hard to keep that carbon bubble from bursting.

So if these warnings are right and Big Oil is truly just fighting for time that's bad news for the fossil fuel industry and for countries with petro-economies.   It's bad news for Iraq and for Saudi Arabia and for Venezuela.   But it would have special repercussions for Canada.   That's because what we're producing in Athabasca isn't conventional crude.  It's not the Middle East product that's easy to pump out of the ground, easy to refine, easy to transport.   No, we have bitumen laced sands.   Hard to get out of the ground, hard to refine, a real bitch to transport.   Compared to the competition it's expensive, carbon filthy and ecologically devastating.

So if the world wakes up one day and accepts we can only consume just one-fifth of known oil reserves, what's it going to be - sweet Saudi crude that comes out of the ground so pure it goes straight into tankers - or the filthiest, most expensive fossil fuel on the planet?   See where this is going?

Canada, Canadians, you and me - we need some straight talk about the future of oil in the 21st century.   We need to figure out what our exposure may be, both economically and environmentally, if the markets come to treat oil as a sub-prime asset.   Even if we should just treat this as a possibility, we need to explore and implement precautionary measures to safeguard the Canadian economy against a worst possible outcome.

One thing you need to keep in mind.   If there is a global carbon bubble, it's first going to burst right here in Canada.

Update

I e-mailed this piece to Bob Rae.   I'll post any response I receive.