Oil prices and low-carbon futures: the horns of a dilemma

Oil prices and low-carbon futures: the horns of a dilemma

Canada epitomizes the dilemma of the petroleum addiction that has the world in its grasp.

Like the other industrial economies of the OECD, Canada has had constant access to cheap and abundant oil over the past century, which has played no small role in shaping the type of society we have become. Everything from our industrial structure to our settlement patterns, from our food production to our supply chains, is predicated on cheap, abundant petroleum, and we feel threatened by the prospect of higher oil prices.

But Canada is also a producer and net exporter of petroleum and, like the OPEC economies, relies on petrodollars for our balance of trade. Canadian oil is not the cheapest to produce, nor the cleanest, and it is situated inland, with limited access to global markets. Canada’s history of exporting natural resources with limited added value extends to petroleum, making the industry particularly sensitive to the going rate for crude oil. (Indeed, the proposed Keystone pipeline to American refineries and export terminals would transport bitumen, a raw product so thick it must be diluted with up to 40 per cent lighter hydrocarbons just so it will flow through the pipeline.) So Canadian producers and the governments that collect royalties from them welcome higher oil prices.

Hence the dilemma. The transition to a low-carbon future is global, it’s being driven only partly by fossil fuel prices, and it has the effect of moderating those prices. Ongoing declines in energy and carbon intensity are being driven more by changes outside the energy commodity markets than by the prices or market dynamics of fuel and electricity. The trend toward greater energy productivity is driven by everything from the redensification of urban cores to the revolution in materials engineering, from the role of the Internet in shifting personal travel and supply chains to the pervasive impact of information processing technologies on just about everything we do and make. Higher fossil fuel prices might accelerate some of these trends, but they are driven less by the cost of energy, much more by the ongoing urge to find new, better ways of meeting human needs. And they are not trends that are likely to reverse should energy prices fall.

Where does this leave the petroleum producer? In a low-carbon future, a large share of today’s market for oil and gas will be offset by a steady increase in energy productivity that has already begun reshaping our energy economy over the last 40 years. Much of the remaining demand will be met by distributed, renewable sources that cost less to produce and are either low-carbon or carbon-free.

If fossil fuel resources were physically scarce, one could imagine a low-carbon future that combined low absolute rates of fossil fuel production with high prices, not unlike today’s gold industry. But fossil fuels are not scarce, not for the foreseeable future. So we must imagine a petroleum industry in a world in which oil and gas supplies are abundant, prices are moderate, and demand is low.

The fossil fuel industry will endure in such a future, but it will need to rethink its value proposition and its business model, and this will take time. Meanwhile, with a global energy transition proceeding at full throttle, large, lumpy investments in relatively high-cost fossil fuel resources seem an especially risky course.

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