Tuesday, March 29, 2011

Why $100 per barrel oil prices are bad for Alberta - and everyone else

Here we are in early 2011 facing oil prices in excess of $100.00. The last time this happened was mere months before the economic collapse of 2008. One might think that this will usher in a new time of prosperity for Alberta and its’ massive oil sands. However, this will not be the case.

The reason why this is bad for Alberta, and everyone else, comes down to more than simple economics. The reality is that it takes energy to produce energy. For example, in the early days of the oil industry if you invested the energy equivalent of 1 barrel of oil into finding, producing, shipping and refining oil from a conventional oilfield, you would yield somewhere close to 50 barrels of oil in return. In today’s industry, with the biggest and most accessible fields long since depleted, you can still yield somewhere between 7 and 10 barrels of oil for every barrel invested. Based on this return, you can quickly see that if oil is $20/barrel, as it was through most of the 1990s, the oil companies could realize a profit between $120 and $180 for every $20 invested - before royalties and after the infrastructure is paid out. Beyond the financial considerations, this profit in terms of barrels of oil provided the energy required to build our modern industrial economy.

In comparison, oil sands production is much more energy intensive. Whether it is massive mining operations or in-situ steam injection projects, when one barrel of oil energy equivalent is invested in an oil sands project the resulting yield is between 1.5 and 3 barrels of oil. When oil prices are $100 per barrel, this is still economically attractive. For an investment of $100 the profit is between $50 and $200. This is very comparable to the financial returns from conventional oil. However, the energy balance is not nearly so favorable providing less than two barrels of oil to power the rest of our industrial economy.

Another way of looking at this is to convert the energy obtained from a barrel of oil to more understandable units like 1700 kiloWatt hours. Once we make this conversion, we see that conventional oil at $20/barrel gives us an equivalent cost of about 1 cent per kWh compared to nearly 6 cents per kWh for the oilsands. In terms of driving, fuel costs are less than 2 cents per kilometer for the average car when oil prices are $20/ barrel but the price increases to 6 cents/km for the oilsands case. This increase in energy cost translates directly to every facet of our life - including transportation, food production and even tar sands mining and rehabilitation. Many of our industries, like the automotive sector, simply can't tolerate energy prices in this range - 2008 proved that already.

As the conventional energy sources are depleting, there is simply going to be much less energy to power the rest of our current lifestyle. A bigger percentage of the available energy will be needed to produce, transport and refine the remaining oilsand reserves. This will add further escalation to the energy prices. Naturally, this will negatively impact food production and transportation in a very significant way.

The bottom line is that we must shift our economy to be more energy efficient. Let’s use the low cost energy of the remaining conventional oil reserves to build a renewable energy infrastructure, more energy efficient buildings and public transportation instead of using it to produce low quality and very dirty oil. Before it’s too late.

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