The trouble with staking Alberta’s future on oil

In an interview on CBC’s The National, United Conservative Party (UCP) leader Jason Kenney last month espoused a view that is persistent in Alberta politics — that the province can once again make a fortune in the oil industry.

“We’re talking about trillions of dollars of potential wealth,” Kenney said, perched on a chair in a coffee shop across from CBC host Rosemary Barton. “There’s a growing global demand, whether people like it or not, for oil and gas through at least the year 2040.”

But with changes in the world’s appetite for oil — and global goals to reduce carbon emissions — Albertans are left to wonder if this is still a safe assumption.

“It’s a pipe dream,” Gordon Laxer, a political economist and professor emeritus at the University of Alberta, told The Narwhal. “We are in the twilight of oil.”

Kenney was citing a report from the U.S. Energy Information Administration that projects increasing oil demand through 2040. Other organizations, such as Carbon Tracker, project worldwide demand for oil could peak as soon as 2023.

When global oil demand will decline — and how it will affect Alberta’s economy — remains up for debate.

“It’s a really tough question for anyone to answer with any degree of precision,” Trevor Tombe, associate professor of economics at the University of Calgary, told The Narwhal, pointing toward an enormous number of macroeconomic factors that influence global oil demand.

“Even in a world of unrestricted carbon emissions, the oilsands still face huge, huge economic challenges,” Jeff Rubin, former chief economist with CIBC World Markets and a senior fellow at the Centre for International Governance Innovation, told The Narwhal.

“Eliminating global carbon taxes ain’t going to fix it,” he said.

Oil prices and Alberta’s downturn

“One thing that many people fail to realize is just how important the global price of oil is for the level of economic activity in Alberta’s oil and gas sector,” Jennifer Winter, assistant professor of economics at the University of Calgary, told The Narwhal.

Alberta oil doesn’t do well when prices are low. It’s more expensive to produce than in other jurisdictions, like Saudi Arabia.

Rubin previously told The Narwhal that oil in Saudi Arabia and Kuwait will be economically viable for much longer than Alberta’s high-cost oilsands. “That’s the kind of oil that’d be the most commercially sustainable, if in fact we’re going to mitigate climate change,” he said last fall.  “Low-cost oil [is] oil that still will be viable even if the world starts consuming less of it and prices decline.”

Prices have, indeed, declined from the highs Albertans were getting used to.

“Since 2015, there’s been substantial shrinkage [in oil prices],” Winter said. “There is a substantial temptation to blame governments for not doing enough… regardless of the political party in power.”

‘Real nemesis is the U.S. shale revolution’

Kenney and his UCP supporters have often accused the “job-killing carbon tax” and “foreign-funded anti-oil activists” of wreaking havoc on the Alberta economy.

That message appears to resonate with many Albertans, Rubin told The Narwhal, but there’s more to the province’s energy woes than taxes and protests.

“Albertans want to see a provincial government that’s willing to be more confrontational with the federal government on the pipeline issue, and I can understand where they’d be coming from,” he said.

“But people shouldn’t also lose sight of the bigger picture here either.”

He points to external factors influencing demand for oilsands crude. “The bigger picture here is the oilsand’s real nemesis is the U.S. shale revolution,” he said.

According to the Energy Information Administration, U.S. crude oil production averaged nearly 12 million barrels per day last month, up from 5.5 million barrels per day in 2011 — more than doubling in recent years.

Alberta’s production is temporarily capped at 3.63 million barrels per day, in the province’s effort to get full value for the resource. Production reached 3.7 million barrels per day last summer.

The Energy Information Administration projects American production will increase to 13 million barrels per day by next year — something Rubin says will have reverberating effects on the demand for Alberta oil.

“That’s not going to change with a change in [Alberta’s] government. They can get rid of the carbon tax, they can have a referendum on equalization…but it’s not going to change the economic challenges from the U.S. producing…much cheaper, higher-quality light oil.”

‘Changes in the energy market itself’

“We’re facing an economic crisis in Alberta,” Kenney told Bloomberg recently. “We need to get our economy back to work.”

This is an oft-repeated refrain in Alberta politics, and relies on the idea that with a few changes to policy, Alberta can boom again.

But there are questions as to whether the current situation is something Alberta can get out of with a change to its tax regime.

“This is different than other previous downturns,” Duncan Kenyon, Alberta regional director at the Pembina Institute, said. “There are so many changes in the energy market itself.”

“There’s a lot of things working against Alberta’s oilsands industry,” Ian Hussey, research manager at The Parkland Institute at the University of Alberta, told The Narwhal.

Hussey listed a few factors that could impact global oil demand off the top of his head: climate-change mitigation measures around the globe, increased use of public transportation, the move to urban centres, more energy efficiency measures, changes to building code standards and issues around the liabilities of the oil and gas industry.

Not to mention legislation mandating passenger vehicles away from fossil fuels (as in France, Denmark and Norway. China and India have announced similar ambitions).

And then there’s the push by many countries to replace carbon-intensive sources of energy with cleaner alternatives.

All affect Alberta’s economy, which is still largely dependent on oil.

A question remains about whether “made-in-Alberta” policies could mitigate the impact these changes have here at home.

“For most countries most of the time, policy affects things at the margin,” Tombe said. “Even what might look like large changes only have a minor effect on the rate of economic growth.”

So plans to cut corporate tax rates or the carbon tax, he says, likely wouldn’t have major effects on economic growth.

“Big moves in economic activity are due to factors beyond any particular government’s control.”

‘It’s bigger than pipelines’

“We just expect oil demand to increase and increase and increase,” Kenyon of the Pembina Institute told The Narwhal. “That oil demand flattening may come much sooner than we expect.”

“We do not have a business plan for that. We do not have a strategy.”

There’s been much talk, of course, about pipelines. Kenney says the Trans Mountain expansion is “a pipeline that is critical to our future prosperity.” But how far into the future?

“It’s beyond pipelines,” Kenyon said. “They’re a big deal for our current structure, but it’s bigger than pipelines.”

Pipelines are often said to be essential in relieving the pressure on Alberta’s oil industry, by allowing access to better-paying markets (though there are questions about whether the oft-touted Asian market for Alberta’s oil may be a myth).

“A pipeline might help us in today’s market,” Kenyon said, “but it does not help us in the next 10 to 20 years.”

Kenyon acknowledges that “the NDP has started that conversation about this, by looking at how you get more value out of [our] products in the province.”

But, he added, we “have to go one or two levels further than that.”

‘Royalty revenues have plummeted’

The long-term strategy for the province’s economic transition remains up for debate.

“You can either have a managed transition off oil, in which you actually have a plan and look after workers and communities,” Laxer said, noting that the province’s coal phase-out is a model for this kind of thinking.

“Or you can have an unmanaged freefall.”

He thinks that the policies advocated for in the election campaign are pushing us toward the latter.

Other researchers point to the province’s decline in royalty revenues as further evidence of problems to come.

Alberta has long been dependent on oil and gas royalties to balance its books.

“You can either have a managed transition off oil…Or you can have an unmanaged freefall.”

“We are not prepared for a drop in global demand for oil,” Tombe told The Narwhal, “for the simple reason that our government relies so heavily on royalties to fund public services.”

According to the Government of Alberta, the total revenue from oil and gas development — $5 billion in royalties and related revenue — made up 11 per cent of the province’s total revenue in fiscal year 2017-2018.

“The provincial government’s royalty revenues have plummeted,” Hussey of the Parkland Institute told The Narwhal. “It just fell off a cliff after the price crash in 2014.”

In 2013-2014, the province received 21 per cent of its total revenue from income from resource extraction. The decline puts the province in a tricky situation.

“I simply haven’t seen the evidence that Alberta is going to go back to funding 20 per cent of public services from resources revenue,” Hussey said.

Without that tried-and-true revenue source — and with concerns that it may decline further in the future — Alberta is in need of a plan.

‘Anxiety about the state of the economy’

Winter agrees the global demand for oil will likely decline at some point, but likely not overnight. “It’s likely to be a fairly sedate decline in global demand for oil,” she said.

Others are concerned the decline may be sooner — and more abrupt — than Albertans are prepared for.

Either way, Winter said, our ability to look far into the future hinges on our confidence in the present.

“There’s still some anxiety about the state of the economy right now,” she told The Narwhal. “That makes it harder to look into the long-term.”

But Kenyon of the Pembina Institute thinks it’s crucial that we start thinking about the future, pronto.

“Long story short, we cannot take for granted that demand for oil is perpetually growing,” Kenyon told The Narwhal.

“When that stops to grow is coming sooner than most people in Alberta want to acknowledge.”

“Which of the political parties are recognizing that?” he wonders. “And who’s coming up with something to try to address that?”