Tuesday, December 06, 2016

Pipelines and the Alberta economy

Pipelines are losing propositions. Oil is a dying industry. It’s only a matter of time. I object to the approval of the Kinder-Morgan pipeline expansion on both environmental and financial grounds.

In 2015, half of all new energy projects worldwide were renewables (non-fossil). 30% of new energy projects in the US were renewables. And this despite low oil prices, and coal that is dirt cheap.

Fact: Peabody, one of the largest coal producers in the world, filed for bankruptcy in April 2016. It now hopes to repay $500 million as coal prices have risen a bit. But in 2015 those prices dropped enormously. Northern Appalachian coal (usually the most expensive) dropped from about $68/ton to under $40/ton by early 2016. It’s now at around $42/ton. See Alberta Energy's website.

You’d think at these prices, energy companies would be building or expanding coal-fired power plants. In fact, many are phasing out coal. China, which has enormous coal reserves, has stopped building them, and is phasing out the ones it has.

Fact: Although oil prices hovered around $40 to $45 a barrel for Texas sweet crude (oil from other sources is cheaper), per capita oil consumption has fallen, despite increasing numbers of private cars, which are the largest single consumers of oil. (Total oil consumptiom continues to rise. Last week, the oil cartel announced production cuts in an attempt to prompt a rise in prices. That is, they hope that oil consumers will bid up the prices as supplies dwindle. That will happen in the short run (they are up to around $48 a barrel), but in the long run, oil consumers will continue to reduce or eliminate consumption.

So why has Trudeau approved the expansion of Kinder-Morgan? And why does Rachel Notley support it? Purely political. Both want to attract more votes in Alberta, especially in the rural ridings, which have more political clout than the urban ones, and where the direct income from oil is proportionately higher than in the cities. In the short run, that might improve their political fortunes in Alberta, but it merely delays the day of reckoning. Alberta has to disentangle itself from oil. It’s been a drug: Albertans are addicted to the easy money of oil royalties. They consistently undertax themselves, relying on other people (the consumers of oil) to pay their bills.

It’s time for Albertans to shift their wealth-creation to other products. That’s not going to be easy. It requires not only a shift in attitudes, but also a willingness to plan for the long haul. Food production has always been a major source of wealth in Alberta. Agriculture, energy production, services, and other raw materials make up a much larger proportion of Alberta’s economy than oil does: See Energy Alberta and Wikipedia's article.
Bottom line: the assumption that oil drives the economy of Alberta turns out to be mistaken. Oil is an important but diminishing part of the mix. I think it’s the psychology of oil that is important, not its actual value. Albertans have made economic choices assuming that oil will pay the bills, and haven’t noticed how much of their economy has diversified. A change in this psychology is difficult, but it’s necessary. The sooner it happens, the better for Alberta.

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