The deal with us and oil prices

The environment-economy dichotomy dominates all climate discussions. That’s where my interest lies – let’s whip out the magnifying glass and probe this dichotomy.

I like hiking. I also like warm showers and nights in the city. Pick one, but not both, because you can’t have both. Or so they say.

I picked up a copy of Jeff Rubin’s The Carbon Bubble on how Canada can actually benefit economically from climate change. He has something worth saying. Check out his interview with CBC’s Anna-Maria Tremonti.

Here’s my one-line book review: insightful, a little alarmist, but well-worth the read.

Rubin’s argument is that the oil sands will sink our economy. Given changes in consumer behaviour and the volatility of the oil market, placing all our eggs in the oil basket and very them firmly keeping there is folly. Here on out, we should focus on two assets with real value which we have in spades: farmland and water.

Rubin’s mixed bag of credentials both buoys him and drags him down like an albatross. He did worked at the CIBC for twenty years, but in 2008 he predicted – loudly and wrongly – that oil would hit $225 a barrel. Read his arguments and double-check his sources.

He raises many good points. Here’s one of many that caught my eye.

Bitumen is costly to deal with. Very expensive. In November last year, Ed Morse of Citi Research noted that investors were pulling the plug on projects that require $80/barrel to break even. Here’s a chart of the break-even costs of every international oil project through to 2020. Mackay River and Nabive Cold Lake are above the $80 mark. Rubin makes the claim that Goldman Sachs, Wood Mackenzie, and CERA have pegged most new projects past $80/barrel. I’ll try digging up more actual sources on this.

We’re now at $43.14/barrel. Check out this NASDAQ chart of oil prices going back 8 years. We’re at just about the same level now as right after the 2008 crash.

Prices were at their highest of the last eight years in mid-2008 at $140/barrel. Imagine how furiously heads must have been nodding to new projects at that time. Here’s a question: if oil could hit $140/barrel, does that mean we’ll bounce right back high prices? Rubin makes the valid point that in 2008, China and India were growing at 10% and 8% each year. China’s now at 7.4% and its GDP growth has been falling ever since 2008. India is also now at 7.4% and has been slowly growing after it hit a valley of 5.1% in 2010.

Other factors to look into when considering the economic viability of the oil sands: cheaper shale gas projects in the US and how we would move the oil – if we can’t move it, we can’t sell it.

Arguments for their economic viability? Look at how many of us drive. Talk to anyone who lives 30km outside of a downtown core. Plastic, airplanes, food, etc.

The bottom line? There is no easy economy power-up. There’s a lot to do before we can dream of long-term prosperity.