Oil and gas extraction has been a cornerstone of Canada’s economy for decades, but plans for expansion of the oil sands represent an enormous economic risk in a world moving to electric vehicles and action against climate change.

The federal and some provincial governments of Canada are not only planning to keep the oil and gas industry running at full steam, but to massively expand it. At the same time, the majority of demand for oil comes from fuel for road vehicles, a segment undergoing a huge technological transformation towards electrification. Canada appears to be grossly underprepared for a future where global demand for oil declines and not only that, our political and industry leaders are currently doubling down on oil as an economic engine — oil that is more expensive to produce than virtually anywhere else in the world.

The plans and investment decisions of the Canadian Government and oil industry leaders imply that, despite what they may be saying in press releases, they are assuming that we are headed towards two, three or more degrees of catastrophic warming globally. In other words, they are betting on global climate failure.

Increasing Pressure for Climate Action

Planning for massive expansion of the oilsands is an enormous risk in a world moving to electric vehicles and action against climate change, writes James Kurz

The IPCC’s recent special report, along with countless others, highlight the absolute urgency of addressing climate change. Global protest movements like the student climate strikes, Extinction Rebellion, Ende Gelände and others are increasing pressure on politicians, while at the same time dramatic cost reductions in renewable energy, battery storage systems and electric vehicles (EVs) mean solutions are clearly affordable and available. As global policy makers are finally starting to seriously consider the implications of these warnings and as technological solutions become clearly affordable, it increasingly looks like a massive shift will occur in the coming decade.

Rapid EV Adoption

One of the most important technological advances and the one that poses the biggest threat to Canada’s economy is the electrification of transportation. According to the International Energy Agency (IEA), road transportation accounts for about 50 per cent of global oil demand; the United States Energy Information Administration reports an even higher share of oil demand dedicated to road transportation for the U.S., Canada’s primary oil customer.

EVs feature significantly better performance for most applications and much lower maintenance costs when compared to standard internal combustion engine vehicles. Continued technological advancements are widening the performance gap, especially given the comparison between a new technology and one that has plateaued for decades. At the same time, economies of scale are driving EV prices down.

In addition, many cities and countries are already planning policies to significantly restrict the use and sales of internal combustion engines by 2030. This includes Copenhagen, Paris, Rome, Mexico City, Brussels, China, Norway, France, Ireland, Netherlands and many more.

There is little doubt that EVs will become the primary mode of land transport in advanced economies in the coming years and EV adoption will result in a decline in global oil demand. EV adoption is accelerating dramatically and even conservative new technology adoption assumptions show that EVs will overtake internal combustion engines within 10 years. This is great news for public health, which will improve as a result of reduced localized air pollution, as well as for total greenhouse gas emissions.

Impact on Oil Demand

Although rapid EV adoption is excellent news from an emissions standpoint, it will put a major share of Canada’s oil industry at risk. The last oil price shock of in 2014-16 was caused by an overcapacity of about 2M barrels per day (a mere 2-3 per cent of production) and resulted in oil prices dropping to below 30 USD per barrel and economic crisis in Alberta. In fact, it is already likely, in my opinion, that enough internal combustion engine vehicles will be taken off the road by 2025 to permanently reduce oil demand by more than 2M barrels per day.

This is a global mega-trend, meaning there is not much Canada could do to slow down EV adoption even if it wanted to. Whether this turning point happens by 2023, 2025 or 2030 is somewhat irrelevant in terms of long-term investment. Once this point of mass EV adoption is reached, oil prices high enough to justify oil sands development would never be seen again.

High-Cost Canadian Oil Will be First on the Chopping Block

This is an immense risk for Canada in particular because the oil produced in the Canadian oil sands is on average the highest cost crude oil in the world — in a commodity market. When the price for crude oil drops, oil sands production is among the first globally to become unprofitable.

As shown in the graphic below, Rystad Energy identifies the Canadian old sands as the resource with the highest cost of production amongst significant oil producing regions globally. This is in line with estimates from other groups, such as the International Energy Agency. Declining oil demand, resulting in chronically low oil prices, foretells a bleak future for Canadian oil development.

Chart from Rystad Energy

When EVs displace enough oil demand globally — which is almost certain to happen by 2030 — Canada’s oil industry will be the first and hardest hit. The international oil industry has begun to understand this situation and is already reacting.

Texas-based Kinder Morgan made the decision to abandon the Trans Mountain expansion project due to risk considerations and was unable to sell the project to anyone except the Canadian government. In February this year, Devon Energy became the latest in a long list of international oil players to pull out of the Canadian market. Between 2017 and 2018, Royal Dutch Shell divested the vast majority of its oil sands assets. In early 2017, Norway’s Statoil (now Equinor) completed the sale of 100 per cent of its oil sands assets. Also in 2017, Marathon oil sold off its assets in the Canadian oil sands.

These international oil companies see the writing on the wall; when it comes to investment in the oil sands, the future supply outlook does not match the picture painted by the Trudeau government. As international companies exit the market, the investors left with what the Bank of Canada now says will be a fire sale will increasingly be Canadian energy firms, banks, government entities and individuals.

Despite all the red flags, the Liberal government has decided to buy the Trans Mountain Pipeline and expansion project for $4.4 billion, an amount the Parliamentary Budget Office has already reported may have been one billion dollars above the project’s actual value.

Canada’s Oil Dependency

It is widely known that Canada’s economy is heavily dependent on resource extraction, particularly oil production and exports. Oil and gas extraction alone typically represents about 5 per cent of Canada’s GDP according to Statistics Canada numbers. It is important to note that this does not include all the related services (e.g., refining, transportation, distribution) or the shares of other industries (e.g., banking and insurance) that are focused on fossil fuels. A sudden and dramatic decline in this industry would cause lasting damage to the Canadian economy.

The Canadian government and Canadian oil industry appear to have fallen victim to the status quo bias, which is typical when disruptive technological advancements emerge. If a fundamental shift towards EVs within the next 10 years seems aggressive, consider that automobiles were owned by under 10 per cent of U.S. households in 1915, but grew to 60 per cent in 1930. The speed of technological adoption has only accelerated since.

The Canadian oil industry has had its time and has been spectacularly successful, but the past is not necessarily a reliable proxy for the future and all signs point to a decline in the fortunes of the oil sands sooner rather than later.

Liberal Contradictions

The Liberals (and Conservatives) may argue that the $160 billion oil and gas sector cannot be shut down overnight, which is true. But what is the plan for replacing it? Shall we just keep investing as if oil demand will grow forever and sleepwalk into a financial crisis? Rapid oil sands expansion is not a realistic plan because a sober, rational analysis reveals that the oil sands will not be profitable in the long- or even mid-term; new projects will likely never be economically viable without heavy subsidies or long-term destabilization of global oil-producing countries. Rapidly expanding oil sands production would come at a great cost to our environment and an even greater cost to Canadians.

Buying Trans Mountain, continuing to subsidize the oil sands and bailing out American energy companies were nowhere to be found in the Liberal election platform in 2015. Even more worrying than this massive sunk cost, there will be many more billions spent if the Trans Mountain expansion actually moves forward and is constructed. Pipelines are expected to be used for 50 years or more, but the likelihood that the Trans Mountain expansion would still be transporting bitumen anywhere near 50 years from now is vanishingly low. Spending on this project would be disastrously counter-productive — it’s bailing water from the lake into an already sinking canoe.

The policy of the Liberal government on this file is somewhat perplexing and Canadians should receive honest answers to some fundamental questions:

  1. How are the oil sands going to compete with Saudi Arabia, Kuwait, Iran, Russia, the USA and all the other much lower-cost producers in a shrinking global oil demand scenario?
  2. If Canada is instead betting on growing oil demand, if we are planning to profit from this at the expense of a 2-degree, 3-degree or much warmer planet, should there not be a corresponding investment in and greater focus on adaptation to the coming changes?
  3. Where are the billion-dollar investments in improving public transit? High-speed rail? Country-wide, comprehensive EV charging network? Renewable energy generation? Energy storage? Passive buildings? Sustainable agriculture? These are all missed opportunities, while the government spends on oil and gas.

Though the Liberal government has made some improvements compared to its predecessor regarding Canada’s climate policy like the carbon tax, unfortunately they are nowhere near ambitious enough.

Furthermore, the Liberal Party’s duplicitous reversal on electoral reform means that the carbon tax could be terminated almost immediately after being implemented based on a tiny change in voter intentions. If the Liberal Party’s plan to expand oil production – already the country’s largest emissions source – is successful, any progress associated with its climate legislation will be swept away and Canada will not meet its Paris Agreement emissions targets.

Profiteer in a tragedy of the commons

The Liberal government is claiming to be the first to seriously address climate change, while at the same time making economic bets that assume climate change will not be addressed either in Canada or globally. In doing this, the government is playing the profiteer in a tragedy of the commons; and furthermore, not playing this game well, because for Canada there will likely be no profit.

We all have family and friends under the age of forty who will face terrible uncertainties within their lifetimes if action on climate change is not taken. But in Canada the burden will not be carried by the young alone. We are all likely to face economic crisis in the next ten years as a consequence of the current plan to double down on expensive oil.

Very well said and certainly makes explicit what the majority likely already know implicitly. But it must push us to disrupt the Big Oil fossil fools and their political lackeys before they destroy everyone, including themselves, environmentally and economically!

Only a person that has no knowledge on the subject would believe the trash written in that article.
Let's start with combustion enines have had 100 years to build the infrastructure for fueling and ŕepair shops. The proposal that by 2030 electric is the answer is ludicrous. Also what new taxes are join to be created if you eliminate gas and diesel? Why I ask because the road tax on those fuels pay for road maintenance. Another point how are you going to build those electric vehicles without the use of fossil fuels? Finally you won't be using your cell phone, lap top, computer, and wiring?

Typical climate change denial. If you are against tar sands expansion you are a hypocrite for using any petroleum based products. Using the same flawed logic, anyone in favour of accelerating the extraction and use of fossil fuels is a hypocrite for breathing clean air and drinking clean water. What total nonsense. Grow up Robert, our planet is in a crisis. Ignoring it because change is difficult is not a viable plan.

Lol so you are a reality denier. What are you going to use to sheath the wiring with out the oil industry? That electric car has many plastic parts what does it look like with out them? You did not answer my question how your cell phone will be made or your computer why? I am all for moving forward to a cleaner world, but the proposal made by reality deniers has NO concept of time management or the realist time to accomplish it. Try operating a electric car without any sheathing on the wiring, good luck .

It is, in short, impossible to support doing anything new instead of the existing thing, because the existing thing already exists and you are already using it. Yeah, good luck with that kind of thinking.
So tell me Robert Logan, do you use an abacus and/or a slide rule? Presumably you're still of the opinion that changing over to calculators, much less computers, would have been hypocritical given that all the calculations used to design the computers would have to be done with old fashioned methods.

On the one substantive point: Electric vehicles don't need fuel infrastructure. Or rather, for the most part we already have it, it's called electric transmission lines. People can after all successfully use electric cars RIGHT NOW. Sure, we'll want to beef up the grid a bit, big fat hairy deal. Although as decentralized solar and battery storage ramp up, there will actually be LESS pressure on the grid. Putting in a few plug-in points is a tiny effort compared to what it took to establish an infrastructure for transporting and storing gazillions of gallons of liquid all over the place. And those plug-ins are well under way even with the minimal efforts that anyone's put in so far. Most people most of the time charge at home, I know I do; I've used an outside charging station twice in six months, but when I look at the map in my car there's always a few fairly nearby.
But your comment is dramatically misleading even on the fossil fuel infrastructure. Just because something has been there for 100 years doesn't mean it took 100 years to build; the infrastructure for internal combustion engines was mostly built in a few relatively short bursts followed by long periods of maintenance and slow improvement. There is basically not a single shred of logic in your entire complaint.

Finally, it wouldn't even matter if you were right. Here's the thing: If we do nothing, climate change will end civilization. If we do everything successfully right now, climate change will just be really expensive and kind of devastating. But there's a lot of room in between there. So say it's not possible to go electric as fast as we think. Or say for some bizarre reason it turns out if we build enough solar panels we suddenly run out of sun, so a complete transition is impossible. Doesn't matter--halfway off fossil fuels leads to less catastrophe slower than not off at all. So we gotta go for it whether the results would be perfect or not. Whining that it might be hard to do is totally irrelevant.

Explain to me how you make a computer, cell phone or electric car with out the oil and gas Industry? You cannot. Now take every thing you use on a daily basis that has plastic in it and throw it out or stop using it. Oh and for you spandex lovers that like your lulu lemon, no oil and gas no lulu lemon. Now explain to the millions of people why they are unemployed. Before you say in the Green industry name 10 jobs and industries they would be working.

You're making our point for us, Robert.

Let's say the road to my workplace is filled with potholes. They're so bad that cars are getting damaged and cyclists are tripping on them. So we complain to the city, "Hey, this road is awful, people are actually getting hurt, and there's no alternative. Can you do something about it?"

Let's say the city responds: "Explain to me how you get to work without using this road? You cannot. Every day thousands of people take this road to work. Think of all of the businesses that use this road, stop going to them. Name me one other road that serves this many people."

Obviously, that's not a real response. It doesn't actually address the complaint; instead it claims that people are hypocrites if they complain about something while continuing to use it. This is such a clear fallacy.

You are correct that oil products are embedded in almost every aspect of modern life. This is *exactly* why it's such a deep problem. This is *exactly* why it's not at all a matter of personal lifestyle choices, eating habits, or whatever. This is *exactly* why it's necessary to make sweeping, unprecedented changes to the very foundation of our economy at a fundamental, institutional level. Because individual actions do not even scratch the surface of the problem. Because even if I lived in the wild, grew all my own food, and weaved my own clothes out of leaves... that would do absolutely nothing to address the reality of climate change.

The fact that no individual person can choose to live without oil not an argument in favour of it; it's the strongest argument against it.

Just ignore Robert...he's just spinning out of ConTroll.

An excellent article and goes to show what a farce the upcoming election is likely to be.

“Rystad Energy identifies the Canadian old sands ..” should read oil sands

Well Said

A good summary I think, of the risks and politics involved. The result? The risk that a century that could have been ours and our childrens (ie "the commons") is being pissed away by the narrow interests of a small number of establishment fat-cats who don't want to loose their sunk investments in oil and gas.

One thing not mentioned is that current investment in oil and gas is a sunk investment, and this means that these investments will continue to produce even at prices well below break-even, loosing money on each barrel due to the need to produce revenue to recover at least a portion of that sunk cost (to the extent that these investors haven't managed to sell that junk-investment to our government as well. It's no wonder the industry is blindly trying to double-down and expand the oil-sands in a hurry to try and brazen their way out of their quandry.

In the meantime, we can continue to expect the O&G industry to continue to push for low licensing rates, continue to renege on local taxes, continue to add to the legacy of O&G industrial liabilities. And we can continue to expect fools to support the government's lackeys who absorb all this trash onto the backs of "the commons" on behalf of their true masters.

There is a coming chance to head off this bleak forecast with the upcoming election if "the commons" can engineer a minority government (CPC or Liberal -doesn't matter -they're both owned by the same masters), which might enable opposition parties to stymie the worst of the major party's attempts to destroy our children's future and leave them with a broken economy and a national debt of staggering proportions, just as the worst of the environmental effects of the Climate Crisis kicks into a higher gear.

A very perceptive piece! Depends on how fast the EV transition will happen, I think it will be fast. Seeing lots of EVs on the road. The EV clubs are pretty active, also auto dealers. I think Trudeau made some assumptions not correct. He banked a lot on carbon pricing. Then the great error, buying Kinder Morgan, Andersen and Kinder very happy. Now what? Does he follow stupid error with stupid error, or does he consider his constituents--US--and cancel the idiocy. He made the promise to Notley, he could claim it only applies to Notley. He should not give in to Kenney, a guy who is only for himself and after power. Kenney is selling out his good Alberta constituents. Get out of the tar sands, get out of fracking gas, you already have great project in solar and wind. Go For It!

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