Canada & World Energy Economics

Address by Hon. David Kilgour
Member of Parliament, Edmonton-Mill-Woods-Beaumont
International Association for Energy Economics Auditorium
Grand Hotel, Taipei, Taiwan
6 June, 2005

Permit me to preface my remarks with two points about energy poverty made by Dr Fatih Birol of the International Energy Agency (IAE) at lunch on Friday. Today, 2.4 billion fellow inhabitants of this shrunken planet or about forty percent of its population rely on traditional biomass, including wood, agricultural residues and dung, to meet their energy needs. About 1.6 million women and children in developing countries die annually as a result of poisoning by the noxious fumes generated by indoor biomass stoves.

Today, approximately 1.6 billion people in developing countries lack access to electricity in their homes. The IAE projects that without vigorous new policies fully 1.4 billion will still lack electricity 25 years from now.

It is within this context of such great energy need that the world is facing some daunting challenges. The entire world's energy situation is currently experiencing some tectonic shifts, which are visibly manifesting themselves in rising and very painful oil, gas and coal prices. Beijing, to offer one dramatic example, is now adding about 30,000 cars to its streets every month, all of which require gasoline. This trend leads one to ask why the world auto industry, with some conspicuous exceptions, is not making a greater commitment toward manufacturing far more fuel efficient vehicles. Why don't governments everywhere follow Japan's lead in applying sharply higher yearly operating permits on gas guzzling vehicles?

Energy is central to the development of any modern economy. As new methods to produce larger and larger amounts of energy were found, this increased technological innovation, which in turn resulted in sustained increases in the general standard of living for some countries. Those populations who have experienced the greatest increases in their living standards have been the ones that have been able to produce and consume the largest amounts of energy. Of course the most important of these energy sources has been and continues to be oil, which accounts for one third of the world's energy supply.

For most of the 20th century, 80% of the world's oil was consumed by the fifth of its population who live in industrialized nations. The lion's share has been and continues to be consumed by the United States, which is partly why it has become the world's largest and most prosperous economy. For 60 years the US has been unchallenged as the biggest consumer of oil and has only had to contend with Europe and then Japan as major consumers. It has therefore been able to consume increasingly large quantities at relatively low prices. Years of abundant supply have encouraged the rapid growth of demand in industrialized countries.


Major Paradigm Shift


This is now changing because 95% of the world is now using modern sources of energy, which has increased competition for access to the world's supply of oil. The emergence of China and India as major economic forces has resulted in a marked increase in demand on a supply that has been unable to grow nearly as quickly. In the last twenty years, there have been fewer discoveries of oil than in the past and those that have been made have been have been of a lesser and lesser size. As a result the cost of finding new oil is growing larger while the potential for reward is diminishing. As of today, a fifth of the world's oil supply comes from 14 gigantic oilfields that are over 50 years old; 70% comes from oilfields older than 30 years.

Within this new paradigm in which the supply growth of oil is shrinking and demand from numerous large consumers is continually increasing, Canada is in a rather unique position. For many years, it has been well known that Canada is home to what are potentially the largest deposits of oil in the world. Since the price of oil in the past had never been expected to remain above $25 per barrel for a prolonged period, Canada's oil sands deposits were not considered to be economically feasible, given the fact that the recovery cost amounted to about $21 per barrel. Recovery costs have since come down to about $18 per barrel while prices have remained relatively high which has increased the recognition of the oil sand's potential


Canada's Energy Edge


In 2004, Canada's proven reserves of oil were officially upgraded from 4.9 billion barrels, which only accounted for conventional oil, to 178.8 billion barrels including oil sands by the United States Department of Energy. This upgrade reflects the capability of Alberta's oil sands to become one of the world's major production areas given the expectation that oil will continue to trade above $30 per barrel for the foreseeable future.

While the US Energy Information Administration (an independent reporting body) now puts Canada's reserves at 178.8 billion, there is in fact much more oil. The total amount of oil trapped in the sands is estimated to be about 1.7 to 2.5 trillion barrels. The current reserve figures only reflect that part of the oil sands which is surface mined and therefore most economical to extract. As technology advances and the worldwide demand for oil continues to put upward pressure on its price, the remainder of Alberta's vast resource will become economically viable.

The relatively recent realization of the economic prospects presented by the oil sands has resulted in a massive investment boom in Alberta as companies compete to secure access to what will probably prove to be the world's single richest reserve of oil. Over the next decade alone, it is expected that investors will invest as much as $87-billion to exploit Alberta's oil sands. This will result in a near tripling of output to about 2.7 million barrels a day. Some observers think Canada's oil output - mostly due to new oil sands output - could rise to five million barrels per day by 2020.

Billions of dollars in related investments will also be made to build pipelines and other infrastructure to transport this oil to markets. If Canada and Alberta were stocks, prudence would most definitely suggest that any portfolio should hold them. Most of the new production from Alberta could well end up going south to the United Sates, putting Canada in the enviable position of being number one supplier to the world's number one consumer. Although few seem to know it, Canada is already the largest supplier of oil to the United States, accounting for about one sixth of American oil imports. As investment in oil sands production continues to increase output, Canada's importance to America as a secure supplier of oil will continue to increase. This is especially so in light of the fact that so much of the world's current oil supply is located in politically unstable or potentially unstable regions of the world.

Out of the top ten countries with the world's largest reserves, Canada is the only stable democracy. Furthermore, Canada is not a member of OPEC, which means that no artificial restrictions will be placed on Canadian supply expansion over time. Moreover, as Canadian supply capabilities have been increasing, so has our distribution capability as well. Pipeline projects under consideration would make possible the large scale export of oil sands petroleum to Asian markets as well. The primary destination for most of this oil would of course be mainland China. Beijing has been aggressively pursuing opportunities to invest in oil sands projects or to secure access to their output.

The implications of this continuing development are quite serious for the United States, which has been heavily dependant on unimpeded access to Canadian oil. Given that American energy needs will only continue to grow while domestic supplies of oil are shrinking, it will be of paramount importance to the energy security of the U.S. to safeguard its access to secure foreign supplies. Already the U.S. must import 58% of its oil requirements. As demand continues to grow and supply continues to diminish, the dependence on foreign oil will grow to the point where even a small disruption in supply would have devastating consequences for the American economy and in turn the global economy. Furthermore, given current production rates of non-OPEC producers and the current pace of new discoveries, approximately 80% of remaining global oil reserves will soon be controlled by Middle Eastern governments. Without securing alternate channels of supply, the U.S. will find itself beholden to undemocratic Middle Eastern states for economic survival if itdoes not guarantee access to more secure sources of oil.

US Vs China in Canada

The U.S. may thus soon find itself in direct competition with China for Canada's oil exports. This will leave Canadians with the difficult task of balancing the competing interests of U.S and China in order to prevent an escalation of geopolitical tensions between the two that could have disastrous consequences for the entire world. Canada must actively encourage cooperation on energy issues between Washington and Beijing. It must also cooperate with China on energy conservation and efficiency and the development of alternative energy sources to reduce the pressures on the planet's limited resources. Cooperation on energy efficiency will be especially important given that China currently still consumes twice as much energy per unit of output as other industrialized nations.

While I have said much about the advantage of the Canada's oil sands endowment, I must also point out that they pose unique challenges as well. Given Canada's Kyoto commitments, it will be necessary to take major steps to reduce the environmental impact of increasing oil sands production. Currently the production of each barrel from the sands creates more greenhouse gas emissions than the amount created by four cars in a day. The process is also quite energy intensive and uses large amounts of natural gas as feedstock for the bitumen conversion. Production processes will have to continue to be improved in order to lessen the demand for natural gas, which is desirable as clean burning fuel for power plants and residential use. An encouraging sign on this front is the recently unveiled proposal by one of Canada's major oil sands producer to implement in its next expansion project a technology that does not require any use of natural gas in the conversion of bitumen into synthetic crude oil.

Overall, energy policy makers everywhere should continue to promote energy conservation and efficiency measures as well as investment in alternative energy sources. Despite the fact that we in Canada have an abundance of oil, gas, uranium and hydroelectric resources, our vast resources will not last forever. Cooperation on a global level is necessary now in order to research, develop and transition the world to new sources of energy and away from the oil economy. A very promising source of future energy, fusion power and the development of economies relying on hydrogen as a primary fuel will require the investment of trillions of dollars and substantial levels of multinational cooperation.

Much like everything else, energy policy has also been subjected to the influence of globalization. It is no longer sufficient for countries simply to develop national or regional policies regarding energy. The degree to which the world is now interconnected has made energy security a problem of global urgency. If we permit ourselves to continue relying on fossil fuels to the extent that we have then we risk facing the kind of energy crisis in future that might signal the twilight of human civilization.

It is imperative that we act all now and act decisively not just to save ourselves but because we must always remember that our greatest responsibility is to pass on a world to our children and grandchildren that holds the promise of greater possibility. 

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