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June
30, 2023
By Michael Barnard
Canada's Inflating Economy & Population Dwarfs Coming
Collapse Of Oil & Gas
Canada is an economic powerhouse that is powering away from its hewer
of wood and drawer of water economy.
DALL·E generated image of Canada inflating like a
balloon, digital art
Like Australia, although a bit less so, Canada is a country with a
massive fossil fuel industry which has far too much influence in the
corridors of power. And like Australia, attempts to grow its economy
run headlong into the looming decline of 2% to 5% of its economy. But
there are some notable differences.
Australia, as I’ve noted recently, exports
four times as much primary energy as it uses
in its own economy. Per a recent International
Institute for International Development (IISD) report,
Canada’s in a similar position, exporting 80% of the oil it produces.
Virtually all of that oil, 94%, goes to the USA. At least Australia’s
exports are diversified. Peak oil demand, looming by the end of this
decade by an increasing number of credible analyses and projections,
is going to cause production drops, but it won’t be even across crude
oil regions. Canada’s crude oil is probably
more at risk than any other country’s, for several reasons.
Canada’s crude oil is heavy, which means it’s really
tar mixed with sand. It has to be processed a lot locally, requiring a
lot of energy mostly from natural gas, something that drives up costs,
and incidentally, greenhouse gas emissions. Alberta has no carbon
price of its own, and so the federal carbon price applies, except to
Alberta’s primary export. That’s covered under Alberta’s TIER
program, which applies a trivial cost to its
carbon emissions for extraction, processing, and distribution, and
then gives the companies the money back as long as they spend it on
green initiatives, like carbon
capture for blue hydrogen for their refineries.
Of course, the provincial and federal governments are ponying up a lot
more cash for that blue hydrogen beyond TIER. Can’t let the oil sands
company pay for their own business expenses, after all.
Hydrogen is required, because in addition to being very heavy,
Alberta’s product is sour as well, which is to say it’s very high in
sulfur. Desulfurization of crude oil is one of the biggest uses of
hydrogen. If we don’t desulfurize it, it causes acid rain when we burn
it, along with harming human health. That makes Alberta’s product more
expensive to refine, which is another strike against it. But hydrogen
isn’t cheap today and will be more expensive in the future. At present
gray hydrogen from natural gas is mostly what’s used, but in the
future, carbon capture technology with sequestration must be bolted on
and used at significant capital and operating expense (with limited
likelihood of significant carbon emission reductions) or green
hydrogen must be used.
Blue hydrogen will likely be double the cost of gray
hydrogen when everything is said and done. Green hydrogen will
probably be double
the cost of blue hydrogen. That means
desulfurization is going to become 2-4 times as expensive, and that’s
another economic strike against Alberta’s product. When there’s a lot
of oil in the world that is sweet and light, why pay more for oil
that’s heavy and sour?
Alberta’s product is a long way from water too. Tripling the volume
capacity of the Trans Mountain Pipeline the federal government bought
for Alberta has quadrupled in price to over C$30 billion and climbing.
The theory was that Alberta’s product would be loaded onto crude oil
tankers and shipped off to China to be refined. Except that China has
already stopped importing Alberta’s product, is electrifying
transportation rapidly and doesn’t refine heavy, sour crude. In a
world awash in cheap, light, sweet oil that’s close to water, China
will simply buy the cheaper better product for its declining needs.
And the Trans Mountain Pipeline terminates in a port
that can’t manage big oil tankers. Port Metro Vancouver can only
handle Aframax tankers with a capacity
of 120,000 tons. Very large and ultra large
crude carriers with double and triple that capacity need not apply.
And oil tankers are as big as they are because the bigger the ship,
the cheaper the shipping costs per ton. China’s not interested in
paying big shipping costs for its crude when it doesn’t have to. Of
course, the tankers could sail down to the Panama Canal and up to
Houston, but that would be a 13,000 km journey for a mid-sized ship
with Panama Canal fees tacked on. Not much of a savings, if any.
But here’s the next problem. Why would the USA want Canada’s crude oil
in the future? For a bit of history, around the OPEC oil crisis of
1972, the USA forbade exporting any of the USA’s precious crude oil.
It started investing in fracking and shale oil technologies and
techniques. Fast forward to the mid-2010s, and it was clear that the
USA was going to go from a massive oil importer to a net oil exporter.
That was without electrification. And so in 2015, the Democratic
members of Congress brokered a deal with the Republican ones,
extending the wind energy production tax credit (PTC) and taking away
the export ban. The Cristal flowed in Houston like a 1930 wildcatters
first strike that year.
But, peak oil demand. And the US Inflation Reduction
Act. The USA is finally getting serious about decarbonizing light
vehicles, and that means batteries,
not oil (and certainly not hydrogen). About
50% of oil in the USA goes into light vehicle gas tanks. While the USA
is a laggard, massive investment and federal subsidies are
accelerating uptake of EVs. And every EV sold drops US domestic
demand. Another big chunk of oil goes into buses and trucks, and they
are all
going to electrify too. It’s already
started.
China’s way ahead of the USA on electrification, with 40,000 km of
high-speed electrified freight and passenger rail in operation and
another 10,000 km planned or in construction. It has around 1.1
million electric buses and trucks on its roads. It now manufactures
and buys two-thirds of all electric light vehicles in the world, and
internal combustion vehicle sales have collapsed. It’s manufacturing
electric ships, with a 1,000 passenger cruise ship in the Three Gorges
and inland container ships plying the Yangtze. The USA’s refineries,
while efficient, won’t have many foreign customers, and will be forced
to buy domestic crude only for the domestic market.
Every time I look at the economics of Alberta’s
product, things just get worse. As I noted in my assessment of the steeply
rising costs of Canada’ Trans Mountain Pipeline,
it’s never going to be full. It’s probably going to be bankrupt by
2040. I’m very comfortable with that projection, and if anything think
it’s possible it will happen sooner.
The future of Alberta’s product is a National Energy Program — not
sure why, but that has a certain ring to it — where all regions of
Canada are required to buy domestically to support Alberta’s economy.
But remember, that’s 20% of Canada’s total production today. And
Canada has strong EV policies as well, so domestic demand will be
plummeting. Alberta is in serious trouble economically.
But is Canada? Back to the IISD’s recent report. It says much of what
I’ve been saying for a while, but adds that natural gas is in the same
sinking ship. And it says that the fossil fuel industry is not
prepared at all for this, and that the federal government has to step
in with a sensible, science-based transition plan for the industry and
provinces that are dominated by oil and gas. That’s very true, but
also remarkably challenging given Canadian politics. The federal
government keeps giving absurd numbers of billions to Alberta,
including buying and tripling the aforementioned pipeline to nowhere,
and in return Alberta keeps loading up its shotgun with rock salt,
shooting the federal government in the face, and threatening to use
buck shot next time.
Headlines started crossing my screen about the IISD report, including
ones that say that it’s not the oil region that’s unprepared, it’s
Canada. But is that true?
Let’s look at some other headlines.
Wait, what? Canada’s an economic powerhouse that’s powering away from
its hewer of wood and drawer of water economy? It’s rapidly increasing
its population with talented, strategically minded, self-supporting,
highly educated immigrants, drawing a million of the best from around
the world in 2022 alone? (Canada brought in as many immigrants as the
USA last year, by the way.)
Even through the challenges of the Trump and COVID years, the Liberals
under Trudeau have been diversifying Canada’s economy so that it won’t
be impacted by the end of oil and gas? And if Canada continues to
diversify and grow its population with the best and brightest in the
world, its economy could be much larger in 17 years?
That’s right. The current administration’s policies since first
gaining power in 2015 have dealt with some of the worst challenges of
this century, brought in one of the best carbon prices in the world,
diversified and grown the economy substantially and are bringing a
river of deep skills and talent to the country. They have kept
Canadians’ lights and heat on through COVID, even when giving money to
Alberta’s oil and gas industry was the unpopular price in the rest of
the country and they received zero thanks from the province or oil
companies. And they are positioning Canada to help Alberta as oil and
gas disappear from our economy.
The IISD and the doom and gloom headline writers missed that the
Canadian government is all over this file, strategically creating the
conditions under which they can help the people of the oil and gas
regions, and ensuring the money to shut down and clean up the messes
that the industry is leaving behind. While the oil and gas industry is
in denial, the Canadian government is acting. That seems a bit
different than what’s happening in Australia.
Green Play Ammonia™, Yielder® NFuel Energy.
Spokane, Washington. 99212
www.exactrix.com
509 995 1879 cell, Pacific.
Nathan1@greenplayammonia.com
exactrix@exactrix.com
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