By David Keith, Sara Hastings-Simon, and Ed WhittinghamIn her first press conference as Canada’s Finance Minister, Chrystia Freeland told Canadians she wants us to “build back better.” Albertans are all in on that idea; we want a better Alberta. This week’s announcement that the province is enduring the largest deficit in its history “by a country mile” shows we have our work cut out for us.
Given her former unofficial role as the federal minister in charge of defusing Western alienation, many expect Ms. Freeland to make moves to build a greener industry with a major public investment in decarbonizing oil production. There is widespread support for this approach. After all, many of Alberta’s oil producers are in the high-cost, high-carbon quadrant, and for them to follow the world in moving to low-carbon energy, the public needs to help with the Herculean adjustment effort. Many see this as critical to the economic future of Alberta.
But this would be a case of building backward, not back better. Peak oil is near – not because of oil scarcity, but because demand is slowing. Electric cars are getting cheaper and better, climate polices are getting stronger, and now COVID-19 has accelerated workplace changes that have and will continue to reduce commuting and business travel.
On the supply side, technological change is also making oil extraction cheaper and more competitive. Fracking of tight oil is a relatively inexpensive option that can be ramped up quickly and inexpensively compared with projects in the oil sands, which require significant capital and time investment.
One need not be an economic Einstein to see that the combination of flattening demand and increased supply means downward pressure on prices. While geopolitical shocks and business cycles will occasionally spike prices, the oil-patch fantasy of a return to long-run triple-digit prices has melted away faster than our glaciers, a fact increasingly acknowledged by the oil majors themselves; even they have begun to muse whether it’s time to stop looking for new oil. This is also why some leaders in Alberta’s oil patch no longer project a hockey stick-like production growth curve, as they did just a few years ago.
But it gets worse. While the growth of global climate policy is unsteady, humanity can’t dodge climate reality, and policies will have to grow stronger. Youth will win the Greta vs. Trump battle. Perhaps quickly. And while our oil is more ethical than Saudi Arabia’s or Russia’s, global markets have not figured out how to price human rights into the cost of a barrel, and it is hard to imagine they ever will.
All of this adds up to a not-too-distant future when Alberta producers will chase a diminishing market with declining prices, using a product that will likely face carbon penalties. We run the real risk of getting priced out of the market for new production in spite of our best efforts. In a carbon-constrained world trending toward cheap oil, the future for Alberta’s industry is bleak, as evidenced by the huge challenge companies now face to secure capital.
Not even the most heroic engineering achievements can change oil-market fundamentals. It’s clear that emissions-reduction moonshots won’t save the industry. Continuing to invest significant funds into maintaining sales in a shrinking market is a bad business proposition and a bad use of public funds. We should let carbon pricing and regulation drive the cost-competitive emission reductions that should be pursued by the companies themselves.
So what’s a new Finance Minister to do?
Building Alberta back better means using public money to develop and deploy new technologies and industries, and to enhance the province’s other industries. It means focusing on how Alberta can win by leveraging the skills and resources we have within our oil industry to develop new energy pathways, such as low-carbon hydrogen for transportation. It means capturing as much wealth as possible from the parts of the oil sector that remain competitive and putting it toward the profit drivers of the future.
It also means applying key guiding questions to any consideration of public investment. Does the investment support a technology or market that can grow and generate economic value to power the Alberta economy? Can the technology demonstrate a credible path to driving the economy in a world beyond oil? Does the investment help to build a bridge to the future or result in a dead end?
We won’t know the exact path up front – whether it will be toward metals, chemicals, manufacturing, transport futures or the new and emerging sectors referenced in Alberta’s recovery plan – but we can build it on what Alberta has in abundance: a high-skilled young workforce and great education.
There is another role for government in managing the dislocation that workers that will face. Transition is a scary word for many working in the oil industry, because it can come across as “transitioning me into not having a job.” But it is less scary than facing market forces with no plan. Instead, we need a transition plan for workers that draws on policy tools such as income replacement, retraining and early retirement. Public money, which is increasingly scarce in these post-COVID-19 days, should be focused in those areas; governments must not succumb to the pressure to fund corporate welfare for investors.
This is what building back better means for Albertans, and for the many fellow citizens we talk to on a daily basis. We hope Ms. Freeland agrees.
David Keith is a professor at Harvard University. Sara Hastings-Simon is a researcher at the Colorado School of Mines. Ed Whittingham is a clean energy policy and project consultant. They are the creators of the Energy vs Climate webinar and podcast series.