The opportunity cost of the oil sands

by Milan on March 18, 2010

in Climate change, Economics, Oil sands, Renewables

The British section of the World Wildlife Fund (WWF) has compiled a report on the opportunity cost of Canada’s oil sands development. ‘Opportunity cost’ is a term used by economists to describe what an individual or organization gives up when they make one choice rather than another. For instance, if you decide to spend an afternoon reading, the opportunity cost would be the best other activity you could have undertaken, such as going for a walk. In a financial example, the opportunity cost of holding your savings in cash might be the interest you could earn by putting it in a bank account or investing it.

Between now and 2025, companies are planning to spend £254 billion ($379 billion) on expanding the oil sands. The report notes that:

$379 billion could cover the cost of the Desertec Industrial Initiative. This would link North African solar plants into a supergrid covering Europe, North Africa and the Middle East, and supply 15% of Europe’s electricity by 2050. Alternatively, $379bn could fund a Europe-wide shift to electric vehicles.

While expanding the oil sands will increase humanity’s cumulative emissions, increasing the odds of catastrophic climate change, a report from the Wuppertal Institute for Climate, Environment and Energy estimated that the Desertec plan could produce 240,000 jobs in Germany, as well as €2 trillion worth of zero-carbon electricity by 2050. According to the WWF report, aggressive expansion of the oil sands could produce the equivalent of 50 billion tonnes of carbon dioxide emissions by 2050. That is a staggering figure, when you recognize that annual Canadian emissions at present are about 750 million tonnes. The oil sands expansion could therefore be akin to 87 years of Canadian business-as-usual, and could singlehandedly increase the global concentration of CO2 by about 3.3 parts per million (ppm).

Our fossil fuel addiction has us searching in ever-more-difficult places to find the fuels required to sustain the status quo. Rather than paying in more and more (both wealth and environmental sacrifice) to get less and less, we should be moving to clean and renewable forms of energy that will keep on giving forever, and which will not poison humans and ecosystems in the mean time.

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. March 19, 2010 at 3:20 pm

“Royal Dutch Shell PLC has launched a spirited defence of its oil sands investments against shareholder critics who want the Anglo-Dutch company to pull back from the Alberta fields.

In a report posted on its website, Shell said the oil sands have been hugely profitable for the company and, despite cost inflation, remain attractive at prices higher than $75 (U.S.) a barrel.

But the company is also signaling that the new investments in bitumen production and upgrading face high thresholds, including consideration of environmental factors.”

. March 19, 2010 at 3:29 pm

Oil sands do well for Shell

Royal Dutch Shell PLC says its returns from the oil sands far outstrip those of other upstream projects. The global energy giant has posted a report on its website in response to demands from shareholders meant to address environmental issues in advance of its April 28 annual meeting.

“Development of Canadian oil sands resources has received increasing attention from shareholders, the media and non-governmental organizations,” Shell said in a statement accompanying the report. “This has included a resolution tabled at our 2010 annual general meeting by certain shareholders, requesting that the company produce a report for our 2011 annual report regarding the context and assumptions behind Shell’s investments in oil sands. We wish to emphasize that we share many of the same environmental and economic concerns raised by the group of shareholders who submitted the resolution.”

Shell detailed its investments in the oil sands, including its 60 per cent stake in the Athabasca Oil Sands Project with its partners Chevron Corp. and Marathon Oil Corp.

“Canada’s oil sands are one of the world’s largest accumulations of crude oil, and should be an important part of the global energy supply equation,” it said. “Oil sands mining activities require high upfront capital investment to build long-term positions that then produce for several decades. Shell expects the cash flows from oil sands to cover these up-front capital costs and to create returns for shareholders for many years.”

Oil sands projects, Shell added, are designed to produce for about 40 years, a long “asset life” providing returns to shareholders. Most notable are comparisons to other upstream projects.

“The initial capital investment in our mining operation on stream was recovered in less than five years after start-up,” the energy company said. “During this period oil prices averaged around US$54/barrel. Oil sands earnings per barrel are typically higher than Shell Upstream averages. Over the period 2005-2009 average earnings for oil sands mining were around US$20/barrel, compared to Shell upstream (excluding oil sands) averages of around US$12/barrel. Over the same period, oil sands mining contributed US$31.-billion to Shell’s earnings and US$5.6-billion to cash flow from operations.”

Milan July 16, 2010 at 4:37 pm

If economic conditions were better, investments in the oil sands would likely be even more substantial. As reported in The Economist:

In the panic after the crash in oil prices in 2008, companies quickly scrapped oil projects around the world. In Canada’s tar sands alone, some $90 billion of projects were shelved.

We will see what happens if the global economy stabilizes, particularly if oil prices rise substantially as well.

Milan September 8, 2010 at 3:46 pm

Arguably, the oil sands also harm the rest of the Canadian economy by driving up the currency.

Tristan September 8, 2010 at 11:27 pm

They certainly damage the productive economy. But, financiers hate production – to keep 3% compound growth forever, production must be outsources to union-less areas without environmental protection.

Milan September 9, 2010 at 2:11 pm

Ultimately, it isn’t the rate of economic growth denominated in dollars that matters for sustainability. Rather, it is the total cumulative effect of humanity depleting natural resources and producing wastes. If we can do both of those things in a sustainable way, we can keep getting dollar-richer forever.

Tristan September 9, 2010 at 7:20 pm

Well, the rate of economic growth denominated in dollars is the closest thing we have to “God” right now. We can either continue to believe, against the evidence, that compound growth is sacred and could not possibly be in contradiction with species survival. Or, we could reject the basic assumption of modern capitalism and move past ideology to real discussions about what kind of economic system can serve human needs.

Milan September 10, 2010 at 1:09 pm

Again, it is the biophysical impact of people that matters when it comes to sustainability, not their quality of life. In particular, improvements in technology and design can make life better while not increasing the strain humanity puts on the planet.

We should certainly hope that capitalism and climate change mitigation can be compatible. If not, an extremely difficult problem is even more insoluble.

Tristan September 10, 2010 at 2:30 pm

How could the idea of infinite growth and climate mitigation be consistent with each other? It’s not enough for prices to continue to go up – the net value of the economy must increase exponentially forever.

Literally, the amount of money that it now takes to earn enough interest for someone to live on must, if invested, not simply continue to be enough money for someone to live on forever – but actually must in the future become a large enough endowment for more and more people to live on.

For example, say the amount of money required today to raise interest for someone to live on is 2 million dollars – if this grows at 3% net in less than 24 years its inflation adjusted value will have doubled (4 million). Now it ought to support 2 people. After 100 years it will have multiplied by twenty!

It is certainly believable to me that the endowment required to support one person in 1910, if invested, would today support twenty people in a similar style. But, this has been a century of capitalism expanding all over the planet, monetizing more and more of the world’s labour, and thereby, earning profit out of it.

Can any sane person believe that 2 million invested today could produce enough, in 100 years, to support 20 earthlings?

Milan September 10, 2010 at 2:42 pm

Money is just an intermediary here. The important quantities are standard of living and total biophysical impact.

Logically, at least, the former can rise as the latter falls. We can build a computer now that is better than a Commodore 64, with less of an impact on the planet than building a Commodore 64 used to produce. We just generally choose to ignore our biophysical impact. As a consequence, it keeps growing and growing.

It doesn’t matter if your nominal income is $500 a year or $500M a year if both quantities allow you to do the same things.

Tristan September 10, 2010 at 4:24 pm

“It doesn’t matter if your nominal income is $500 a year or $500M a year if both quantities allow you to do the same things.”

Where above did I refer to nominal income? I was speaking about net income. What capitalism presumes is that we will be able to do 20 times as many things with any given amount of capital, if we invest it at the average rate of growth for 100 years. Or, 400 times as many things if we wait 200 years.

Do you really think it’s feasible that a dollar today is worth 400 dollars in 200 years? That means if I put away a thousand dollars in a trust fund for my great-great-great-great-great-great grandchildren, they should be able to buy a house with it? And not just me – everyone must be able to do this. All of my great great-great-great-grandchildren should never have to work, because a trivial investment on my part will be enough for them to live off?

The only way this could be possible is if, in the future, life becomes unimaginable cheap. And given climate change’s effects on human systems – this seems very, very unlikely.

Tristan September 10, 2010 at 4:26 pm

“The important quantities are standard of living and total biophysical impact.

Logically, at least, the former can rise as the latter falls. ”

So, the standard of living will continue to grow at an exponential rate, while our biophysical impact drops – despite the fact that our current standard of living, in every measurable way, is totally dependant on unsustainable biophysical impact.

A serious question is – has 3% growth ever been achieved when biophysical depletion is accounted for? What is the real rate of growth for the first 150 years of modern capitalism, when the externalities related to the survival of our species is taken into account? Do you know of anyone who has tried to work this out?

Milan September 10, 2010 at 4:55 pm

Capitalism is not synonymous with a 3% growth rate. For one thing, there is a big difference between 3% real economic growth in a state with a rapidly growing population and 3% growth in a state where the population is slowly falling.

My basic point is very simple: the material character of life can continue to improve, even as we reduce the biophysical impact of humanity. A key mechanism for achieving that outcome is increasing the degree to which people pay for their externalities.

Tristan September 10, 2010 at 5:12 pm

“Capitalism is not synonymous with a 3% growth rate. ”

Really? Without such a growth rate, what is the value of capital? If I can’t earn a return on my investment – why will I invest at all?

Isn’t capitalism characterized by the distribution of capital according to the location where it can achieve the highest safe growth? And hasn’t the last financial crisis demonstrated the perverse incentives this creates to manufacturer new safe investments?

What happens if the incentives to invest go down? Investment goes down – capital stagnates, is not re-allocated at all. What is the solution?

One solution is, perhaps: the state can be much more effective at allocating surplus capital than the market. This is because the state is allowed to care about positive externalities. Put it this way – could a private market ever win a total war? No – total wars are one when a state puts its economy into war-mode, where capital which the market would have invested in consumer products is instead invested in weapons production.

You yourself have compared fighting climate change to fighting a war – is not a similar transition from free market to state capitalism required to allocate capital in a way consistent with the survival of the species?

Tristan September 13, 2010 at 9:22 am

“Capitalism is not synonymous with a 3% growth rate. For one thing, there is a big difference between 3% real economic growth in a state with a rapidly growing population and 3% growth in a state where the population is slowly falling.”

I really think you’re way off: capitalism is characterized by the distribution of capital according to best rate of return available. If the economy is not, on average, growing – them on average people with capital have no reason to lend. Inflation can help with this problem, but in capitalist states today it’s quite clear that federal banks are in the pocket of high finance – that’s why we responded to the financial crisis with huge bailouts rather than by declaring many of the debts null and letting the banks fail.

Capitalism with a zero growth rate, or with population decline, simply does not afford the same efficiencies of capital allocation which an infinitely growing economy does. If the growth rate is to, in the long term, decline, we’ll need to find other ways of efficiently allocating capital.

Obama’s recently announced 50 billion infrastructure spending plan is an example of this. The mistake, however, is to think the state has to “borrow” the money – the purpose of this allocation of capital is the market’s inability to efficiently allocate capital itself. We are, in effect, getting “something for nothing” when we exploit potentially lost growth potentials, and as such, inflationary financing should be considered.

Milan September 13, 2010 at 4:19 pm

Capitalism is just a way of letting people interact economically within a certain sort of political and legal framework. Just as 19th century capitalism differed significantly from the 20th century (and present) forms, carbon constrained capitalism will differ as well.

I don’t see why the system cannot be adaptable enough to take climate change into account, once appropriate regulations and price signals have been put in place.

Tristan September 14, 2010 at 11:36 am

Capitalism only allocates capital efficiently (and then, according to its own, largely insane, notion of efficiency) in conditions of overall growth. You can try to artificially create similar incentives through inflation, but investors will tend to choose to hold commodities rather than invest if the rate of inflation is similar or higher to the rate of growth.

People invest because they will make a return. If there are fewer and fewer strong returns to be made, the system goes into stagnation. That’s why the property bubble was blown up – there was a need for strong safe returns, so banks manufactured them through bad mortgages and complex derivatives. Much of the growth prior to the crash was financial, not real growth. Growth based on people going farther into debt to buy the same thing, not growth based on people paying or borrowing (net) more for more or better products.

Real growth, how we would measure it if we were aliens and recognized the deep implications of decreasing marginal benefit, is measured in quality of life. Major quality of life indicators have not gone up in 1st world countries in 40 years. This is something we should be really worried about – capitalism is not actually allocating capital in a human-efficient way.

And, we should stop being so blind and recognize that Bretton Woods 2 was probably the most important change to world political power dynamics since the 2nd war – the removal of regulations against capital flight turn all third world states into banana republics.

Milan September 14, 2010 at 2:38 pm

I think you are assuming that far too many characteristics of ‘capitalism as currently practiced’ are fundamental to capitalism in all of its forms. If we ever get to a point where the regulatory system compels a stable or falling biophysical impact from human activities, capitalist structures will adapt themselves to function in tha environment.

A system based around state planning – calibrated for an ever-growing economy – would also need to undergo such adjustments, as a transition was made toward a ‘steady state’ level of environmental impact.

Tristan September 20, 2010 at 9:03 am

Ok, so, give your picture of how a market allocates capital in a situation of continual decline of net growth?

Tristan September 20, 2010 at 9:03 am

“capitalist structures will adapt themselves to function in tha environment.”

What will this look like? If you can’t explain in detail, and give reasons, then it’s just a religious belief.

Milan September 21, 2010 at 9:18 am

Markets will allocate capital to areas that promise the best return. Where that is will depend on the regulatory structures in place. If there are means by which economic growth can be sustained at the same time as humanity’s biophysical impact will be falling, then investments will be made in those growth areas. If not, investments will be made in areas where returns are shrinking least.

Capitalism has been able to adapt to all manner of changes, and there is every reason to believe that it can adapt to the need to employ zero-carbon forms of energy. We just need the regulations in place to compel the change.

We may not know in advance exactly what a zero-carbon capitalist state will resemble, but that possibility is much more in reach than a completely vague, undefined notion of some kind of non-capitalist zero-carbon state.

Milan September 21, 2010 at 9:58 am

It is also worth noting that some of the most comprehensive economic estimates of the cost of stopping climate change have shown that the cost to society at large could be too small to even be noticed. The organizations that face the biggest economic challenge from climate change are those whose growth plans depend fundamentally on emitting more, and where growth in profits is impossible without growth in emissions. That covers oil sands producers, but not many other economic actors.

Tristan September 21, 2010 at 2:19 pm

“Markets will allocate capital to areas that promise the best return.”

” investments will be made in areas where returns are shrinking least.”

Returns will shrink least on stockpiled resources. Why do you think the price of gold has shot up? If I genuinely think the economy will shrink over time, I’m better off investing in hoarding beans rather than taking a chance on a carbon capture and sequestering project.

Tristan September 21, 2010 at 2:20 pm

“Where that is will depend on the regulatory structures in place.”

Regulatory structures are only possible if the larger portion of the business party supports them. Since regulatory structures on carbon threaten the entire business party – they will not be passed, or if passed, not have teeth.

Milan September 21, 2010 at 2:21 pm

The Stern Review and other analyses have concluded that we can shift to carbon neutrality very affordably, without fundamentally altering our economic system. We just need to overcome resistance from the companies and industries with the most to lose from carbon pricing.

Too bad they are so politically successful at the moment.

Tristan September 21, 2010 at 2:22 pm

“Capitalism has been able to adapt to all manner of changes”

Really? Name one crisis capitalism has solved, rather than delay or shift to a different part of the globe.

Genuine solutions to capitalist crises involve massive amounts of “communism”, i.e. war spending, or in the US since the war, military industrialist spending. This spending is the state allocation of capital for the long term benefit of corporations. Strictly speaking, it is state-capitalist in the same sense the USSR was state-capitalist.

Milan September 21, 2010 at 2:29 pm

Fine, if you prefer a different word for our economic system, you can use it. It doesn’t matter.

The basic point I am making is that it is pointless to reject our economic system in favour of a ridiculously vague alternative, especially given that we have no reason to expect the alternative to be any better at dealing with climate change.

Tristan September 21, 2010 at 3:01 pm

No one is suggesting we reject our economic system for a ridiculously vague alternative. What I suggest is that we criticize our economic system as it actually works, for the problems it actually has. The economic system “we have” can certainly be reformed into a system which can work for humanity – but this will, I think, challenge existing institutions and powerful forces which man those institutions.

This doesn’t mean the total elimination of markets, but we don’t have total-free markets to start with. The reason why I think it makes sense to oppose “capitalism” is because the allocation of capital by investment for short term profit is extremely inefficient – and this is already recognized as such, and is a major reason why the military industrial sector exists.

The reforms I believe in are a shift to move to the collective allocation of capital to serve long term social and species interests. This requires an increase in actual democracy (the allocations can’t be decided simply by the business party – it is their short term interests which got us into this problem in the first place).

Tristan September 21, 2010 at 3:02 pm

As for the idea of a “ridiculously vague alternative” – an actual alternative is being experimented with in various parts of Latin America as we speak. Alternatives were also tried in Haiti, although this twice led to US backed military coups to bring down the democratically elected governments.

. January 23, 2011 at 8:22 pm

At 173 billion recoverable barrels, the tar sands are worth $15.7 trillion at today’s price. As the resource owner, Alberta captures much of this wealth, but a good deal filters through to the rest of Canada in contracts for goods and services as well as in federal equalisation payments that send some of the rich west’s billions to poorer eastern provinces.

Anonymous November 9, 2017 at 11:10 am

Damn, Tristan! Really told him off!

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