The US SPR is the largest emergency supply in the world with the current capacity to hold up to 727 million barrels (115,600,000 m3). The second largest emergency supply of oil is Japan’s with a 2010 reported capacity of 583 million barrels (92,700,000 m3). Also, China has begun construction and planning for an expansion of a SPR that will place their SPR at 685,000,000 barrels (108,900,000 m3) by 2020, surpassing Japan.
The United States started the petroleum reserve in 1975 after oil supplies were cut off during the 1973-74 oil embargo, to mitigate future temporary supply disruptions. According to the World Factbook, the United States imports a net 12 million barrels (1,900,000 m3) of oil a day (MMbd), so the SPR holds about a 58-day supply. However, the maximum total withdrawal capability from the SPR is only 4.4 million barrels (700,000 m3) per day, making it a 160 + day supply.
Back to Obama
Administration officials have sent mixed signals in the last several days about the possibility of opening the reserve, which is a rare step. Energy Secretary Stephen Chu said on Friday that the administration was monitoring prices, but he seemed reluctant. “We don’t want to be totally reactive so that when the price goes up everybody panics and when it goes back down everybody goes back to sleep,” he said. A few days earlier, Mr. Chu said that the administration was watching closely, but expected oil production that had been lost in Libya because of unrest there would be made up by production elsewhere.
Not question Energy Secretary Chu but who is going to pick up the slack? OPEC is planning on raising their output by one million barrels a day but that has as much to do with Saudi oilfields coming back online after maintenance than it does about an ability to raise production. According to Wikileaks and other sources, Saudi Arabia can’t and neither can anyone else. As Jeff Rubin blogs, only a recession is going to stand in the way of $200/barrel oil and as we found out last time, when oil gets to be higher than $100/barrel, the price is more than global markets can afford and oil dependent economies enter into a recession. Previous record high prices of $147 per barrel prices brought global economic growth to a halt. According to Rubin, gas is about to hit six pounds a gallon (£1.32 pounds/liter) and the British government is already considering rationing systems which could be needed by 2020.
This isn’t about rising prices rising because of Libya or Egypt. If it was that simple, releasing oil from the Strategic Petroleum Reserve would make sense, just as it did after Hurricane Katrina. The problem is that oil prices were higher than $100 per barrel before the protests started in Egypt. Global demand was already in excess of a record 87 million barrels per day. It was yet not about potential supply problems from Libya or anywhere else in the Middle East, it is just that the world is running low on oil and we haven’t been able to find the oil stocks to meet demand.
If the President of the United States admitting that the world is running low on oil in a press conference, this would cause a lot of damage to consumer confidence, create even higher price spikes and inspire Tea Party supporters to chant “Drill, Baby Drill” at Sarah Palin campaign stops, and perhaps start the painful transition to the future. Or you can just pretend it’s a temporary problem and tap the Strategic Petroleum Reserve. Leadership and getting re-elected are often two qualities that are often in tension with each other.
Closer to home energy independence isn’t an issue, Canada is an oil exporter but we do sell our oil on the open market which means as oil goes to $200/barrel on the open market, we pay $200/barrel oil. A couple of years ago when we bought the cabin, it was almost $70 to fill the tank on the Honda Accord which had an impact on how we shopped, vacationed, and lived. It was part of the reason why I drive a 1993 Ford Festiva today. At one time you have a mini-van or a SUV for long trips, the time might be coming that we have smart car’s for the same reason.
As a province, $200/barrel does wonders for the balance sheet of the Saskatchewan budget. It makes any finance minister look like a genius. Look at what Alberta oil revenues did for Stockwell Day (before he put on a wet suit). It also will generate higher food prices as more and more of the continent’s arable land is converted from wheat and corn we eat and is earmarked for ethanol production. That’s great if you are an oilman or if you are a grain farmer. Well actually since 99% of Alberta’s oil reserves are in the oil sands, it’s only great if you are a huge multinational oilman in Fort McMurray.
It’s not so great if you are a consumer, someone in England looking at $2.09/litre for gas or someone that is looking at another summer of skyrocketing food prices here in Canada. With elections on the horizon in Ontario, Saskatchewan and perhaps across the country, you don’t hear a lot about energy and food prices or creative policy solutions that are going to provide any relief to us in the future with oil or natural gas prices long term.
In fact, Canada doesn’t really have an energy policy at all, unless you consider pump it out as fast as we can as an energy policy and that’s not a sustainable policy. To break down the problem, I’ll look at it by sector. Let’s take a look at natural gas first.
According to the BP Statistical Review of World Energy, Canada is the third largest producer of natural gas but ranks only 21st in the amount of proved reserves. In Alberta, which produces 80% of Canadian gas, the average initial productivity of a gas well has declined by 72% since 1995, meaning we have to drill nearly four wells today to equal one average well in 1995.
As Stats Canada points out, Canada’s between December 2006 and December 2007, gas production is declined 8.7% with the Alberta Energy and Resources Conservation Board feels that we will see a further overall decline in Alberta natural gas production of 35% from 2009 levels by 2019.
Even the industry magazine, Oil Week says Alberta has “squandered” a lot of their natural gas.
It is not commonly known that 80 to 90 per cent of Alberta has had declining natural gas production for a number of years. In the extreme case, northeastern Alberta has seen production drop to 35 per cent of its peak 10 years ago. Even the Alberta Deep Basin, where production grew by over one billion cubic feet (bcf) per day between 2003 and 2007, has struggled to maintain production levels in the last couple of years.
Unfortunately, even the most optimistic predictions of unconventional gas drilling and production cannot mask the terminal decline that is afflicting the Alberta gas industry as a whole.
AJM Petroleum Consultants geologists estimate that raw gas production in Alberta has already dropped from peak by nearly 3 bcf per day, but at 11 bcf per day of sales gas, Alberta is still currently in third place behind Russia and the United States in worldwide daily gas production.
Alberta will not run out of gas anytime soon. But the fact is we have squandered our easily produced, low-cost natural gas resources and have very little to show for it. Without the government ensuring that Alberta is the most attractive place in the world to explore and develop natural gas, the significance of Alberta´s gas industry to the Albertan and North American economy will wane quite rapidly.
Of the major gas producers in the world, only Canada has a lower reserve to production ratio than the US. In Saskatchewan, SaskEnergy practices a policy of hedging and has done a pretty good job of protecting Saskatchewan consumers from price spikes. Despite as supplies dwindle the price will keep getting higher and higher. Because SaskPower uses natural gas for it’s peaking stations, this not only affects us keeping our houses warm in the winter but also just keeping our air conditioning and energy efficient lights on in the summer.
While I enjoy taking a drive out to the Gardiner Dam on a lazy summer afternoon every year, it only generates less than half of what the Queen Elizabeth II peaking station does, which relies on natural gas. Saskatchewan just opened the Lily Wind Farm near Moosomin which contributes 26.4 MW of energy to our grid and is only one of three wind farms in Saskatchewan (generating about 200 mw) that generates 5% of SaskPower’s needs. According to SaskPower, they have gotten almost everything they can get from wind general as it can only generate 8% of our province’s electricity needs. This is a problem because as the province grows, the need keeps increasing and according to SaskPower, they are generating as much power as they can. Saskatchewan currently consumes 3,600 megawatts on average. We are going to need to generate another 1,200 to 1,750 megawatts by 2020 because of mixture of growth and the fact that some of our coal fire plants are being decommissioned.
An even more severe problem is our oil supply. As Ralph Klein loved to point out, Alberta has the second largest supply of oil in the world, right behind Saudi Arabia (or even more than them as you never really can trust their stated oil reserves) with 174 billion barrels of recoverable oil in the oil sands. Now that part we agree with but comparing it to Saudi light crude oil isn’t a fair comparison. Oil sands recover is very energy, capital, and time-intensive to produce compared to easier conventional light oil. As Jeff Rubin wrote in his book, Your World is About to Get Smaller, the fact that we have to go after that hard to get oil proves we are running out of oil. While the Alberta economy has benefitted from the massive investment of capital and resources to extract oil from the oil sands, there is still not a lot of oil being produced. Estimates of five million barrels per day by 2025 have been toned down to three and a third, which is still nearly triple current production. This would take Canada’s total production of oil to 4.1 million barrels of oil a day which would allow us to remain energy sufficient but since oil in Canada is sold at market prices, still pay the same amount as the rest of the world in terms of price and believe me, we will need to purchase a lot of it.
Globally, finding the numbers of how much oil is left is hard to determine.
According to the Oil and Gas Journal (2009), proven reserves of oil worldwide at the end of 2009 amounted to 1,354 billion barrels — a marginally higher volume than estimated a year earlier and the highest level ever attained. Reserves have more than doubled since 1980 and have increased by one-third over the last decade. Half of the increase since 2000 is due to Canadian oil sands reserves; most of the remainder is due to revisions in OPEC countries, particularly in Iran, Venezuela and Qatar. There are continuing question-marks over the estimates for some OPEC countries and their comparability with the figures for other countries. Notwithstanding these uncertainties, OPEC countries account for about 70 per cent of the world total reserves, with Saudi Arabia holding the largest volume.”
At 2009 rates of oil demand (84 mb/d), 1,354 billion barrels is enough for a little over 44 years.
Which means that we will see rising prices from now until the oil runs out… or gets to expensive to go after. This is what will make it a rough transition for Canadians.
Canadian lifestyle isn’t the most energy efficient. Canadians are among the highest per capita consumers of energy in the world, exceeding even Americans and most nations that don’t have subsidized energy policies. We consume about five times the world average and more than 80% of this consumption is fossil fuels. Why so much? Part of it is geography based. It’s cold up here which means that we spend a lot heating our homes in the winter and a lot of energy cooling them down in the summers. The other geographical feature is we are spread out. In the last two weeks I did four trips of 827 kms from Saskatoon to Winnipeg and there isn’t a lot between them (no offense to Regina or Brandon). We have electoral districts the size of some countries that are so vast that candidates need to fly around them to campaign effectively. With much of our economic power in relatively few cities, we rely on cheap ground or air transportation to move goods throughout the country. Agriculturally many of our inputs are petroleum based and of course high fuel costs mean higher costs for farmers and producers in terms of machinery and transportation. With the elimination of the Crow Rate in the 1995, much of Saskatchewan’s train and grain handling infrastructure was eliminated or changed making it even more expensive and fuel intensive to get grain to market and then to bring that grain back to us. I can give you a hundred other examples but however you look at it, Canada is dependent on cheap energy and we love to exploit it for our own use and to drive our economic growth.
So what happens when oil hits $200/barrel? While we like to blame the banks for the current economic chaos and they have a lot of explaining to do, it was oil that hit $140/barrel that pushed the world into recession and oil prices are headed on up again. Even at today’s $118/barrel, that is enough to push us back into a global recession, even if it is not as severe as the previous one. These recessions may be a way of life. Oil prices go up, we head into recession which drives demand and oil prices back down. The cycle continues itself when there is an economic recovery as demand goes up and so does oil prices starting the cycle all over again.
Yet no government at any level seems to have any idea about what to do about this. Stephane Dion might have been correct with his Green Shift in the long haul but a carbon tax was a hard sell as any tax that encourages changed behaviour is going to be attacked. We saw this with Jack Layton wanting taxes lifted on home heating fuel. While we should be encouraging people to shift away from expensive and carbon emitting heating sources, there is a tax on home heating fuel which means that someone is going to rail against it. Every time gas taxes, opposition parties across the country call for gas taxes to be cut, as if repealing taxes will solve the problem of diminishing oil reserves.
What are the solutions?
For some there is always the assumption that technology will bail us out. Years ago we heard about Ballard Fuel Cells and how they were going to change anything. Then they gave up because you can’t make it work at a price point that makes sense. Then it was electric cars. In Saskatchewan’s winter, a Chevrolet Volt will only drive about 25 miles before it has to switch to the motor. There is ethanol which has made a big difference in Brazil with their flex fuels but in North America, the same crops we use for food are being switched to ethanol production. This lead to some of the large increases in food prices we saw over the last couple of years. To meet his 2030 targets of 60 billion gallons of ethanol being produced, almost 400% more corn will need to be used which means even more price increases. For those of you who think that someone should challenge these goals, let me remind that the state of Iowa grows a lot of corn and has this thing called the Iowa caucuses. Iowa voters love high corn prices and high paying refinery jobs. My point is that the best technology or common sense doesn’t always win out.
The good news is that north of the border in Saskatchewan, SaskPower seems to be taking some of the steps needed. Revitalizing and expanding our electrical grids, diversifying into wind, and even offering incentives for people to produce their own power and sell the electricity back to them (an idea that doesn’t make a lot of sense right now because of the time it would take to recover your investment but it’s a step in the right direction). Saskatoon has made some noise about using the weir to generate a limited about of hydro power as well as building a test wind turbine at the landfill site. Some municipalities are taking advantage of solar power to keep the lights on in schools and places like Harry Bailey Aquatic Centre. These make a difference but in the end don’t generate/save enough megawatts to make up for the loss of coal burning plants and increased electrical needs of the province. While the decision to bring nuclear power to Saskatchewan was controversial and rejected, I can’t help but wonder if 20 years from now when Saskatchewan and much of North America is struggling with an overwhelmed grid, we will regret not forging ahead with clean energy.
With natural gas, SaskEnergy tries to make it as inexpensive as possible to upgrade to a super high efficient furnace. At the same time I can’t help but get a sick feeling in my stomach every time I hear that an energy company has been acquired whose specialty is extracting hard to get to natural gas deposits. The viability of these technologies means that we can look forward to more and more price increases in the days ahead.
What do we do about an increase of oil prices. This is going to impact Saskatchewan in many ways. Since the elimination of the Crow Rate, Saskatchewan’s rail infrastructure is diminished which is going to cause us grief in the transition into a world of scarcity. In case you forgot, Warren Buffett just bought Burlington Northern Santa Fe Railway for $34 billion because he sees the importance of rail travel in moving freight to market at a fraction of cost of ground transportation. There does seem to be some understanding of this on a federal level. In Saskatoon we are familiar with the Asia-Pacific Gateway and Corridor Initiative as it contributed $20 million to complete Circle Drive The federal rationale is that these projects will improve access to the Canadian National Railway’s rail yards south of Montgomery in Saskatoon. The other big project in Saskatchewan is $27 million to the new CPR intermodal facility west
of Regina and upgrading the road connecting highways 1 and 11. It’s a start in making it easier and cheaper for freight, fuel, and food to move to us and to our export markets.
Locally, it changes the way that tourism happens. When we go out to the lake, we tend to go out for two three day weekends a month in the summer. It costs us $30 if I take the Festiva, $70 if we take the van an of course $100 if we are taking about both vehicles. While we are out there, Wendy will run out of something or make a menu change and Mark and I will drive into Strasbourg for what we need. Other times we head down to Regina for a Rider game or because I ran out of things to read and we need to visit Chapters. It often costs us another tank of gas by the time things are all said and done. That’s fine at $30/tank or $50/tank for the Accord. It’s not fine when it is $100 tank. That will change our consumption patterns dramatically. Instead of 10 quick trips out, we may instead move to three extended trips. There won’t be any gravel road photography or quick trips into town.
Getting out to enjoy Saskatchewan or see friends may not be as easier or inexpensive as we have grown accustomed to it being. STC has been an institution in Saskatchewan for decades, even if it isn’t your preferred way to travel. I’ll be honest, bus travel is not my favourite. Body odour, drunk passengers, and stopping at every small down between hear and Edmonton has added hours to what should be a pretty quick trip. Will STC or Greyhound offer a first class bus between Saskatoon and Regina or between Saskatoon and Calgary that features free wifi, movies, and a steward? As the economics of travel change, there is going to be new opportunities. The dream is always going to be high speed rail but as the Acela’s average speed of 120/kph is only slightly higher than that would be of a bus (or my Festiva for that manner) between Saskatoon and Regina.
Oil isn’t just connected to transportation, it’s connected to the food we eat and rising costs of oil lead to higher fuel costs. Higher costs of fuel mean that input and transportation costs are higher, both from the producer to the mill and from the mill to the store. Since fuel costs are higher, we have more acreage being dedicated to ethanol production, making food crops even scarcer. Also you have China buying up vast tracts of land around the world so that their farm workers have jobs and their people have food. Food grown in Africa and is shipped to China only adds to the world food price pressures and drives up global prices.
Much of what we purchase is not local but is shipped across the country. The watermelon on the shelf at Safeway or Superstore today was not grown locally, it may not have even been grown on this continent yet at the same we don’t have the infrastructure to eat locally. While the Saskatoon Farmer’s Market is a great venue and a fun place to spend a Saturday morning, it doesn’t provide the volume, variety or the frequency to make it easy or cost effective to eat local. Oddly enough Wal-Mart is leading the charge in this area as they foresee a future where fuel costs are going to alter the way we eat. Who know if Safeway, Supertore, and Sobeys will follow Walmart’s lead or be forced to drastically alter how they get food to our tables.
The Canadian Wheat Board is an export agency but it is going to need to change to allow for more locally grown and produced wheat products or it’s going to have to create a local infrastructure to allow for cheaper food production in local markets. Years ago some Manitoba farmers wanted to set up a pasta plant and sell it their own wheat. This is against the law in Canada (which still boggles my mind) as you can only only sell to the Canadian Wheat Board at a price they set so the plant idea died. In some ways it means that as consumers we are caught in the same cycle with food as we are with eat. Food shortages in China drive up international prices and we pay more in Saskatchewan for crops that we produce here.
While I don’t think we are going to run out of food, it is going to cost us more and will pay much more for the variety that we want. This is going to alter the landscape for Saskatoon’s lower class. The Bridge on 20th does almost 70,000 meals a year, the Salvation Army does 100,000 meals a year, the Saskatoon Food Bank has 15,000 visitors a month or 180,000 a year and while I can’t speak for The Bridge and the Food Bank, the Salvation Army’s increase is partially linked to rising fuel costs. These are going to be people who are least likely to have a Chevy Volt or a Toyota Prius and don’t have easy access to a neighbourhood grocery store.
The interesting thing is that it may cause a reordering of our civic lives. High fuel and food prices have hit cities before. Jeff Rubin looks at Sarajevo during the U.N. sanctions and fighting drove fuel to $6/litre. To go back even further, England spend years with fuel and food rationing from the start of WWII until 1954. Even today in some islands in the Caribbean, food and fuel prices are extremely expensive.
What happens? Cars get parked, bicycles come out an life becomes local again. Local grocery stores, corner stores, and coffee shops start to become the centre of culture rather than the malls and the big box stores. Food becomes seasonal again. We may even start to grow gardens. The city of Saskatoon is redesigning and rebuilding Mayfair Pool. Since I moved to Mayfair has been irrelevant because I can go to any pool I want in the city. Why do I need to go to my local pool when I can drive to Lawson Heights Civic Centre and enjoy the wave pool? Gas prices or as in England, gas rationing will make us think twice. In the future local spaces like Mayfair Pool will become important again, as will my local church, my local pub, and my neighbourhood coffee shop, even if it doesn’t sell Starbucks. The world will get smaller but I don’t know if it is going to be worse. It’s just going to be different.
The losers in all of this are bedroom communities or exurbs that don’t have a sustainable local economy. A friend told me that she spends $500/month in gasoline to commute into the city for work. What happens when that doubles? You either find work in your community or you do what thousands of others do, you move a lot closer to work. Some will discover that local economy but other towns will slowly go away.
We are left with two choices as a city. As Rubin puts it, fundamentally change how we live or get caught in a cycle of recession after recession. Neither choice is going to be solved by a little more oil being put on the markets by the Strategic Petroleum Reserve, Saudi Arabia, or the Alberta Oil Sands. It’s too big of a problem.
Tomorrow I’ll spend some more time looking at Saskatoon’s future in terms of peak oil.