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August 18-31
VOL.14 ISSUE. 26
HOME / STORY

Oil’s Well That Ends

Paul Dechene
Published Thursday February 18, 06:27 pm
Help people who’ve lost their jobs, not the pipeline pimps

I did my commerce degree at the University of Alberta in the early 1990s. At the time, NAFTA and free trade was a common topic in business classes. Why did we sign on? How awesome will it be for Canada? Exactly how wrong are all the free-trade skeptics in the media? Penetrating questions like that.

A specific critique of the deal that I remember coming up a few times was, “If labour is cheaper in Mexico, won’t the manufacturing sector in Ontario and Quebec pick up stakes and move south, putting thousands of people out of work?” The answer from my business profs — and from many of my fellow future Gordon Geckos — was a slightly more nuanced, “So what?” If it’s more efficient for manufactured goods to be produced outside Canada, they said, then that’s the best thing for the economy.

As for the workers displaced by the loss of those industries, they can retrain for employment in a sector where Canada has a comparative advantage.

That’s what I remember, anyway. But it was a long time ago and memories fade. So I hunted around a bit and found a 1998 article from right-wing think tank The Fraser Institute titled, “Debunking The Myths.”It was written by Marc T. Law and Fazil Mihlar to combat what they perceived as misconceptions about NAFTA (which stands for the North American Free Trade Agreement).

In the section that tackles the claim that freer trade will destroy Canada’s manufacturing base, the authors respond, “Our first objection is to simply shrug our shoulders and ask: Who cares? Why should we care where the manufacturing companies locate, so long as we get to consume manufactured goods? If the purpose of economic exchange is to raise our wealth so we can consume as much as possible, then why should we care how that wealth is created? And why does it matter where the goods we consume come from?”

Yeah. That sounds about right. And whether you think in hindsight NAFTA was super-awesome — or not — the point to take away from all this is that, confronted with the prospect of Central Canada’s manufacturing sector being gutted by freer trade, the response from many in Western Canada was, “Too bad for you but that’s capitalism.”

I bring all this up because, as you’ve probably heard, Western Canada is taking its turn at being gutted. Thanks to a surprise collapse in global oil prices making costly tarsands projects unprofitable and causing many to close up shop, the unemployment rate in Alberta has shot up nearly three per cent since 2014. And in Saskatchewan, we’ve seen our rate climb by two per cent.

Figures like these have inspired many to call on the federal government to find some way to support the ailing oil sector and protect the workers who’ve lost their jobs in the wake of its collapse.*

People are suffering. An industry is in grave trouble. And yet, try as I might, despite all my years of business education in the free-market wonderland of 1990’s Alberta, I can’t bring myself to say to these people, “Too bad for you, that’s capitalism.” Somehow, I emerged from my B.Comm. with a bit of compassion intact and so I’m happy to see the $1 billion in stimulus spending that the Trudeau government promised for Alberta and Saskatchewan in mid-January.

Still, I can’t help but worry that $1 billion won’t be nearly enough. And I fear that trying to stimulate the industry by getting behind a project like the Energy East pipeline will just be throwing good money after bad, as signs are mounting that the oil industry’s current woes are far worse than a mere rough patch.

According to Andrew Nikiforuk in his Tyee article, “Why the Wild Descent of Oil Is Cause for Concern,” the current collapse in oil prices is just the latest symptom of a wider problem of diminishing returns from petroleum extraction. At the dawn of the oil age, when a company used one barrel of oil worth of energy in its drilling operations, it could expect to yield 100 barrels of oil or more in return. Nowadays, with the easy-to-reach oil all but used up, we’ve switched to sources that are dirtier and more expensive to extract, like shale oil and bitumen. As a result, globally, one barrel of oil invested yields barely 17 barrels in return. And in some areas, like the Alberta tarsands, one barrel invested will net less than 10 in return and sometimes as little as three.

For most oil companies to remain profitable under those conditions, prices have to remain above $35 a barrel. But as most oil companies fund their operations through borrowing, even when prices tank, they have to keep pumping to maintain a positive cash flow to pay their lenders. And that contributes to the market’s chronic oversupply and keeps prices deflated.

But the problems for the industry don’t end there. Of far graver concern are the greenhouse gas emissions that are an inevitable byproduct of oil extraction and use. The environmental impacts of CO2 represent a cost to society that the industry has yet to bear. And as the world has just passed through the warmest year — and warmest decade — on record, and as the global warming related costs of droughts and other extreme weather events are finally being accounted for, international agencies and national governments are looking for ways to control the carbon emissions causing the warming.

Already, Alberta is finding tarsands oil a hard sell on international markets due to its reputation for producing massive greenhouse gas emissions during production. And the Trudeau government has committed (like the Harper government before it) to end the $1 billion a year in subsidies to the oil industry in Canada. That’s a promise that some government will eventually follow through on.

Farther out, pressure is mounting for the federal government to impose some kind of national carbon-pricing scheme, whether cap-and-trade or a carbon tax.

Put together, what this means is that economics itself is turning against the oil industry — it’s caught between the Scylla of diminishing returns of production and the Charybdis of its costs to the environment. It’s unlikely to navigate those hazards unscathed.

If it survives at all.

Maybe it’s for the best if it doesn’t.

* For instance: Media pundits and oil industry boosters across the country have been calling on the Trudeau government to help the industry by championing the Energy East pipeline. Also, in January, a former oilpatch worker in Lloydminster made national headlines after posting a Facebook message to Justin Trudeau calling for support for struggling families in Alberta, a province that, he writes, “hasn’t taken an equalization payment in for over 50 years and has done more than its fair share in supporting the East in that time.” Then in mid-February, Saskatchewan premier, Brad Wall (who, last year, pondered asking for a refund on federal taxes collected in the Saskatchewan to help pay for worker retraining) pitched a $156 million program to Ottawa that would put people back to work in the oil-and-gas sector, cleaning up well sites abandoned by the industry that was supposed to clean them up. 

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