On Energy Investments

Pipelines are once again front-page news in Canada, with the pressure to approve Energy East and the Kinder Morgan expansion growing amid questions of how the new government will change regulation procedures. Is another investment in the fossil fuel industry really in the national interest of Canada?

What Is At Stake:

Jobs. This is the primary concern that keeps coming up over and over again, as unemployment in Alberta has recently risen to match the rest of the country for the first time in decades. Many people have been downright uncharitable toward people in Alberta who are actually going through very hard times, and I must admit that I too have scoffed at some of the stories of misfortune I’ve heard; the scale of wealth these people previously experienced makes it hard to understand how they could now be in a desperate situation. But I’ve also lived in Fort McMurray, if only for a summer, and even in that short time I realized just how out of balance the economy of Alberta really is: mobile homes there cost as much as mansions in southeast Manitoba, groceries are more expensive, and with the sudden and sharp rise in unemployment, many people are not even able to sell off some of their possessions to pay bills because the market is flooded. People have large mortgages on homes that have already lost over $100,000 in value, and there are no buyers. These people made major investments during a boom cycle, but now we’re shifting to a bust cycle, and they can’t escape.

That’s the danger of resource economies: they depend on global commodity prices, and that makes them very vulnerable to boom/bust cycles. But that raises the question: if we’re deeply concerned about creating jobs, shouldn’t we be looking to create jobs in industries that are less prone to this economic roller coaster?

Exports. Much economic growth in the global marketplace requires exporting goods: if Canada is buying more foreign goods than we are exporting goods, then more of our money is going outside the country than foreign money is coming in, and we can’t keep that up forever. A sustainable economy in a global marketplace needs a lot of exports, and having valuable exports also draws foreign investment, which is how industries get bigger and economic growth occurs. For the past decade, Canada has been looking to export oilsands bitumen to foreign markets, but to do so we need to get it from northern Alberta to a port, where it can be loaded onto tankers and carried to foreign markets.

The Northern Gateway pipeline was looking to take oil to the west coast, but to get there it had to go through many First Nations, and the waters of northern BC are dangerous enough that a tanker spill was inevitable. Thankfully, that pipeline seems to have fallen off the radar. The Keystone XL pipeline is supposed to take oil from Alberta to the US gulf coast, where it can be refined and shipped to foreign markets; President Obama vetoed approval of that pipeline, and with the US in a presidential election year it is unlikely to get approval from anyone anytime soon. That leaves us with Energy East, which would send oil to eastern Canada to be shipped to foreign markets, and the proposed expansion of the Kinder Morgan pipeline through Burnaby Mountain which would double tanker traffic into Vancouver.

There are two things to make very clear here: first, that these pipelines are not about the oil we use here in Canada. Contrary to popular myth, they are not going to be bringing oilsands oil to Canadian refineries for domestic use. This oil is entirely for export. Second, the oil market is currently flooded with OPEC oil. OPEC (Organization of the Petroleum Exporting Countries) is able to control the price of oil on the global markets by increasing or decreasing their production, and considering they control 77% of the world’s oil reserves, they’ll be able to do so for quite some time. When they decreased production in the 1970’s there were fuel shortages in North America; when they increased production over the past few years, the price of oil plummeted, currently at around $33 per barrel. That’s a level that remains profitable for OPEC nations, but not for oil production in North America. They have enough reserves that they can afford to keep the price of oil low for as long as they need to in order to maintain dominance in the global market. So for the forseeable future, there are no good markets for Canadian oil.

Our environment. Shipping oil is risky, whether by pipeline or by train. If the oil spills it can contaminate waterways, which greatly extend the effects of the pollution. Water becomes toxic to drink, and plants and creatures that inhabit the waterways and depend on the water are affected – as well as the people that depend on those ecosystems. Because pipelines are usually kept far away from major centres, the people most affected by pipeline spills are almost always First Nations communities, but we all depend on our natural environment, and every aspect of our natural environment is deeply interconnected. If we pollute our nation it will cost us, one way or another and sooner or later.

So those are the stakes: jobs, economy, and ecology. The case for the environment is strong, but because we often won’t see the negative effects of what we do today for decades, it’s easy to push aside. Jobs seem to be the most pressing issue, but the jobs in the oil industry are unstable because of the boom/bust cycle. The case for the economy is the strongest case for pipelines, but given that we can’t control the global price of oil, it’s not a good investment yet. But once pipelines are installed, they’ll keep for a long time – and the price of oil won’t stay down forever, right? It could be said that even if it won’t pay off for a while, pipelines are still a good investment.

But that’s just the financial side. There’s another type of investment that we don’t often talk about: energy investment.

Energy Return On Energy Investment

No matter what source of energy we use, it takes some energy to generate energy. When people were first drilling for oil in the US, it only took about one barrel’s worth of energy to gather 100 barrels of oil – so the return on investment was 100x. But those days are long past, and even conventional crude oil pumped in the US today from existing wells only get about 14.5x the return on investment; the oil is deeper and harder to get to, so it takes more energy to pump it up.

Every energy type has an Energy Return on Energy Invested (EROEI) score, not just oil. Photovoltaic solar panels, for example, have an EROEI of 6.8 – over their lifetime they will produce almost 7x more energy than it took to create and install them. That’s not great, even in comparison to today’s crude oil (14.5) – but as solar panels get more efficient and cheaper to make, their EROEI will increase. Meanwhile, oil’s relatively high EROEI of 14.5 is for existing wells; the energy it takes to discover new oil drops it down to 8, and alternative forms of oil have even lower EROEI.

Shale oil, recovered through fracking, has an EROEI of 5 – significantly lower than solar panels. The BC provincial government is really pushing Liquified Natural Gas (LNG), which is a nice name for shale oil and fracking. Should they really be pushing an industry that is so inefficient? (Not to mention dangerous: earthquakes in BC have been directly linked to fracking.)

But we were talking about Canada’s investment in oilsands. As low as the return on investment is for fracking, oilsands is lower: they have an EROEI of 3, less than half that of solar panels, and one sixth that of wind turbines. Yes, wind turbines have an EROEI of 18, higher even than conventional crude from the US. Hydro’s EROEI is actually 100, because dams last so long and, once installed, take very little energy to maintain. In terms of energy investment, then, renewables blow oilsands oil out of the water.

Canada’s Energy in the Global Economy

One of the arguments I keep hearing in favour of the oilsands is that oil from other countries is morally compromised. But aside from the fact that all oil is ethically compromised (we know that burning oil causes climate change, and that a changing climate will potentially kill millions), trying to beat unethical oil with slightly less unethical oil is not only insufficient, it won’t work. OPEC nations have a double advantage over us because their oil is still conventional crude.

Because the OPEC nations have a lower standard of living than North American countries, they can pay their workers much less: the wages of an oil worker in Alberta is worth many workers in Saudi Arabia or Venezuela. But more than that, their conventional crude is much easier to access: while US conventional crude has an EROEI of 14.5, global conventional crude has an EROEI of 35, meaning that they can access the oil much easier and cheaper. This is why a global oil price of $33 per barrel works in OPEC’s favour: oil is still profitable for them at that price, while it is almost entirely unprofitable for us. To put it another way, our EROEI of 3 vs theirs of 35 means that oil is 10x more profitable for them than it is for us, so they can drive the price down to 1/3 of what it was a few years ago and still do well.

At the same time, renewables are a growing industry, and Canadian companies are already in the top 10 globally in solar. Solar and wind turbine manufacturing require complex skillsets that can pay decent wages, even in Canada, and there are many Canadians who used to work in manufacturing who are currently out of work. Canadian Solar, a company that has installed 19 gigawatts worth of solar plants worldwide, has a manufacturing plant in Guelph. An increased national investment in renewables on the level of the investment our government has made in oil for the past several decades would create manufacturing, installation, and maintenance jobs, employing many times more workers than it takes to extract oil in long-term stable jobs.

Further, renewables also allow us to export energy. But rather than loading dangerous fossil fuels onto tankers to be shipped around the world, we can export our energy directly to the US through our already shared energy grid. The US generates almost half of its energy from fossil fuels, and is willing to pay premium rates for imported clean energy to reduce their own dependence on coal and natural gas. It may not be as profitable as oil exports at their best, but peddling oilsands in a market flooded with cheaper, cleaner crude is hardly oil exports at their best.

Are pipelines in Canada’s best interest? Since most assessments make little of the environmental argument, which I would argue should easily outweigh arguments of short-term economic gain, the economic argument will have to stand: is there a good return on investment? When it comes to energy, absolutely not; and when it comes to money, certainly not right now and not likely to be in the future. The better return on investment is in renewables, whose ROI and EROEI will only increase over time.

2 thoughts on “On Energy Investments

  1. Thanks Tim!

    I will, if I can afford it. We have a long way to go before electric vehicle infrastructure is as ubiquitous as gas stations, and batteries may never charge as quickly as we can fill a tank. But we actually already have the infrastructure in place to serve the vast majority of use, because most of us only drive to work and back most days, and we can charge a car overnight with a regular plug on most models. But investment in infrastructure will ultimately make even most electric cars less important, because improvements in transit and driverless cars will change the way urban populations get around altogether. I think electric cars will still be important, but I don’t think that we need to worry about convincing every single person to drive an electric car, because by the time we get that level of buy-in we won’t need it.

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