Here are the Hidden Pitfalls of Increasing U.S. Dependence on Canadian Oil Sands
Canada is the biggest supplier of oil imports to the United States. Increasingly, those imports come from its vast reserves of oil sands. Is the growing U.S. dependence on Canadian oil sands a win-win deal for both countries, crucial for U.S. energy security, and a source of jobs and economic growth, as American Petroleum Institute President Jack Gerard claims? Is the development of Canadian oil sands “the most destructive project on earth”, as a Canadian environmental report calls it? What pitfalls for policy makers and investors lie hidden in the heated rhetoric coming from both sides in the oil sands debate?
The debate places much emphasis on how just dirty or clean oil from the Canadian sands is compared with the alternatives. Detractors prefer to call them “tar sands” to project an image that is as dirty as possible. (Both “oil sands” and “tar sands” are popular terms; purists prefer “bituminous sands.”) They cite data showing that greenhouse gas (GHG) emissions for a barrel of oil from Canadian sands run from three to as much as seven times as high as from a barrel of conventional Texas crude. Oil sand supporters cite different numbersthat indicate only 5 to 15 percent more GHG emissions from the sands than from conventional oil.
Surprisingly, the widely differing numbers do not come from competing scientific teams. Instead, both sides draw on the same studies, like this one from the National Energy Technology Laboratory of the U.S. Department of Energy. A closer look at the underlying data shows that two factors account for the gap between the “clean” and “dirty” numbers for oil sands.
One is whether GHG emissions are measured on a “well-to-tank” basis or a “well-to-wheels” basis. Most of the extra GHG emissions for oil sands come from the energy-intensive process of getting the gunky bitumen out of the ground, upgrading it to refinery quality, and then refining it. That is the well-to-tank part. Subsequent highway use of the fuel, regardless of its source, produces the bulk of GHG emissions for the whole well-to-wheels fuel cycle. As a matter of simple arithmetic, then, moving from a well-to-tank measure to a well-to-wheels measure makes oil sands look relatively less dirty.
The second source of the gap between the clean and dirty numbers lies in what oil sands are compared to. Oil sands detractors like to use U.S. domestic crude as the basis for comparison. On a well-to-tank basis, DOE data show that production of diesel fuel from Canadian sands emits two and a half times more GHG than the average for diesel from domestic crude. But domestic crude is a poor basis for comparison. We use all our domestic crude first; after that, we have to go out and import the rest. The decision to use more or less oil from Canadian sands means importing correspondingly less or more from other sources. It turns out that almost all U.S. oil imports are low quality, heavy, or high in sulfur, meaning more emissions from extraction and refining. Long-distance transportation adds more emissions. All things considered, then, it appears that oil from Canadian sands is about 10 percent dirtier than crude from Nigeria (8 percent of imports) and 42 percent dirtier than oil from Mexico (12 percent of imports) on a well-to-tank basis. The gap is even less on a well-to-wheels basis.
So what do we really learn from parsing the DOE emissions data? We learn that although oil from Canadian sands is dirtier than average, no oil is really clean. As far as GHG emissions are concerned, what really matters is the total quantity of oil that is used. Where it comes from makes some difference, but a fairly small one.
Our discussion of the environmental impact of Canadian oil sand development would be incomplete if it stopped with the GHG issue. There are also major adverse effects on the local environment. One big issue is land reclamation. Much of the bitumen is recovered by surface mining, which leaves a moonlike landscape in place of the original boreal forests and wetlands. Water is another issue. Both surface and subsurface extraction of bitumen use vast quantities of fresh water and leave behind huge storage ponds full of toxic tailings. Candice Beaumont, an industry supporter who thinks oil sands may help delay “peak oil,” describes the situation this way: “If a bird flies over a river near the oil sands, the bird dies just from flying over the river. It’s that toxic. They are just dumping all the waste into the waterways. If you did that in the U.S. you would be in jail.” (She discounts environmental impacts on the grounds that few people live in the main mining areas.)
Canadian authorities, to their credit, require that producers restore the land and water, and deposit funds in escrow to ensure that they do so. However, critics question the adequacy of the regulations. They point out that restoration technology is poorly demonstrated–very little land and none of the most toxic tailing ponds have actually been restored as yet. Furthermore, they argue that the required escrow deposits are not adequate to protect against potential disasters like a major wastewater spill.
Because environmental concerns cannot be entirely dismissed, oil sands supporters play the national security card. As the American Petroleum Institute’s Jane Van Ryan puts it, “Every barrel imported from Canada could replace one from a less secure source, adding to our energy security and benefiting our economy.” To evaluate the energy security argument, we have to think both about the nature of the oil security threat and that of the global oil market.
One aspect of the security threat is logistical. If, say, a civil war cut off supplies from Nigeria, the United States would have to scramble to find alternative sources. Contracts would have to be renegotiated. Tankers would have to be rerouted. Refineries would have to be reconfigured to handle a different type of crude. Even if those adjustments were eased by releasing oil from the strategic petroleum reserve, there would be short-term costs.
A second aspect of the security threat comes from oil price volatility. Oil is an import into virtually everything produced in the economy, and a major component of the cost of living. Sharp spikes in oil prices caused by war, politics, natural disasters, or industrial accidents send shockwaves through the whole economy.
A third security concern is who ends up pocketing the vast revenues generated by high oil prices. It has become a cliche to point out that not all oil producers are among America’s closest friends. At worst, oil money funds authoritarian governments, the weapons programs of hostile states, and terrorism.
What could be better, then, than to replace oil from unstable countries like Nigeria with oil from friendly, democratic, and near-by Canada? It sounds good, but when you think about it, the security benefits are less than they seem. Again, consider a hypothetical Nigerian civil war. How much would it matter if, before the war started, Canadian output had expanded by enough that the United States was no longer an importer of Nigerian crude? It would not matter very much, because the global oil market operates as a single pool. Oil prices everywhere would spike as other countries scrambled to replace Nigerian oil. The dictators, hostile arms programs, and terrorist training centers we worry about would still get their inflow of new money. The U.S. economy would still be set back by higher import costs, unless, perhaps, our friendly neighbors to the north generously agreed to keep selling us oil at the low, pre-crisis price. True, there would still be logistical benefits to a short pipeline link with a stable Canada compared with a long sea route to a volatile Nigeria, but those would be of a second order of magnitude. For national security, as for the environment, the biggest part of the threat lies in excessive total consumption of oil, not in the specific sources from which that oil comes.
The preceding discussion of environmental and security issues reveals the hidden pitfalls of growing U.S. dependence on Canadian oil sands.
The pitfall for U.S. policy makers is that stable and abundant Canadian supplies will serve as an excuse to avoid the hard work of implementing a rational energy policy. Such a policy would be one that accounted for the full cost of every unit of energy from every source, new and old, and imposed those costs on the end user through higher prices. Meanwhile, Canadian policy makers would hopefully make sure that producers were pricing in the full costs of contingent liabilities from land reclamation and wastewater spills. A well-coordinated set of policies would place appropriate charges against all forms of energy, but oil from Canadian sands would take one of the biggest hits. Yes, such a policy would substantially increase end-user energy prices in the United States, but once the transition was complete, the economy would be strengthened, not weakened. AsI have argued elsewhere, the one thing the country definitely cannot afford is “affordable energy.”
The pitfall for investors is that putting money into the development of Canadian oil sands amounts to a bet that both the United States and Canada will, for the foreseeable future, remain committed to pro-producer policies that are non-rational from the point of view of broader national interests. True, that is not a completely stupid bet. Oil has a strong lobby on both sides of the border, and both governments are currently committed to further oil-sand development. But that might change.
It would be a mistake for investors to fool themselves with the arguments their own lobbyists are using to underplay the environmental impact of oil-sand development and overplay its national security benefits. Experience shows that a crisis can quickly shift public sentiment, and when that happens, politicians tend to run for cover. A generation ago, Chernobyl and Three Mile Island shifted sentiment against nuclear power. Last summer, BP’s blowout in the Gulf of Mexico did the same for offshore drilling. A dramatic climate event like an ice-free summer on the Arctic Ocean or a burst dam on a big Alberta tailings pond could do the same for Canadian oil sands. At such moments policy can shift quickly from irrationally permissive to irrationally restrictive. Investors beware.
Ed Dolan is an economics professor and author of Ed Dolan’s Econ Blog.