[R-G] Crude Future: 'The Oil Sands that Bind' & 'We'll never run out'

[Anthony Fenton]

[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.