By David Yager
After the COVID-19 virus chaos finally ends – and it will end – it will unfortunately be replaced by another major challenge.
At the end of next year, Canadians will have to deal with one of the most economically damaging and disruptive public policies in history, the Clean Fuel Standard (CFS). This was created because of the Liberal government’s determination that Canada meet its 2030 emission reduction commitments made at the 2015 Paris climate conference.
What’s coming is a massive increase in carbon taxes. Set to become law in 2022, the CFS will require mandatory reductions in emissions from all sources of carbon energy including gasoline, diesel fuel, kerosene, light and heavy fuel oils, natural gas, propane and coal. Either use less in your life and in commercial processes or purchase offsets through a carbon trading system.
This will be painful because over half of the energy required by consumers, business, industry and agriculture comes from natural gas, gasoline or diesel fuel. This ensures Canadians will pay more directly for heat and transportation and indirectly through higher costs in the entire food, goods and services supply chain.
And it will be expensive. The Canadian Energy Research Institute (CERI) has calculated that this policy will cost each Canadian household nearly $1,400 because of an effective carbon tax of $163 to $170 per tonne, over five times current levels. The total cost to the economy at implementation will be about $7.7 billion rising to $15.3 billion in 2030. For context, the annual budgets of the governments of Manitoba and Saskatchewan are each about $14 billion.
The disruptive element of Ottawa’s determination to possibly be the only country in the world to meet its 2030 Paris commitments is what higher energy prices do to the behavior and lives of the people who have to pay more. Higher energy costs are not simply increased costs for transportation fuel and home heating. In the face of finite income, they affect the entire economy and require significant adjustments in spending on everything else.
Higher real energy costs that began 15 years ago are already crippling the entire economy with no relief in sight without a major policy rethink. The best article I’ve read recently that highlights this challenge is titled The Narrative Problem After Peak Oil from the website https://consciousnessofsheep.co.uk/2020/11/06/the-narrative-problem-after-peak-oil/. It paints a gloomy picture from a perspective that deserves further discussion and analysis.
It starts with the history of oil and how petroleum became the dominant energy source in the past 100 years because of cost, utility and power. The low-cost producer until 1970 was the US. But low oil prices first came under pressure nearly 50 years ago with the OPEC price spikes of the early 1970s. High oil prices were recessionary and one of the major drivers of high inflation and interest rates for a decade, a period that was coined “stagflation”. High inflation, high interest rates and no economic growth.
But high oil prices caused new supplies from Alaska, the North Sea and Gulf of Mexico to become economic which, combined with flat demand, drove prices down. The article reads, “And while prices never quite fell back to their pre-1970 levels, they fell sufficiently by the mid-1980s to allow a new round of economic expansion to begin.”
Higher energy prices were recessionary for the global economy and still are. Nothing has changed, except that governments are creating money and adding to the public debt at unprecedented levels to disguise the true cost of what is occurring to this fundamental input of modern civilization.
The article says that peak conventional oil production was reached in 2005. What followed was a steady rise in oil prices until 2014 and the large-scale development of non-conventional sources. This included the oil sands in Canada and shale oil in the US. Even Saudi Arabia had to resort to horizontal drilling for the first time to sustain production levels early this century. Kuwait is now employing hydraulic fracturing to get more out of formerly prolific reservoirs.
The year 2005 is when legendary Houston investment banker Matthew Simmons wrote his famous book, Twilight in the Desert. This was in response to Saudi Arabia having to use non-conventional drilling and recovery methods to sustain production for the first time. During this period many believed that oil was destined to reach $200 a barrel by 2020.
But it never happened that way. Straight line extrapolation ignoring all other factors failed yet again. The article says that oil is not “just another relative low-cost factor of production. The wage bill, for example, is always far higher than the energy costs of running a business. But as economist Steven Keen explains; ‘capital without energy is a statue, labor without energy a corpse.’ Or, as energy professor Jen-Marc Janvovici explains; ‘energy is what quantifies change.’ Nothing happens in the world without energy. And when the cost of the world’s biggest primary energy source – oil – begins to spike upwards, the impacts are felt in every area of our lives.”
High energy prices cause every other part of the modern economy to adjust and contract. To compensate people seek higher wages or they spend less money on other things.
When international credit markets tanked in 2008 causing the global financial crisis, the blame was laid on sub-prime mortgage loans and overleveraged consumers. But the article blames rising inflation caused by much higher oil prices. Seeing inflation rates outside of their target range, central bankers raised interest rates. But it wasn’t classic inflation which was “…too much currency chasing too few goods… (it) was actually an economy adjusting to its first supply-side shock since the 1970s.”
So at the same time more people were borrowing to buy houses that supposedly would never decline in value, central banks were raising interest rates which caused more borrowers to default on their mortgage payments. Homeowners’ ability to make their payments was further squeezed by the rising cost of everything else from gasoline to food.
Looking back, somehow the skyrocketing price of oil prior to the 2008 financial crisis got a hall pass. It should not have. In the decade from 1990 to 1999, WTI averaged only US$19.72 a barrel. By 2005 the average price for the year had risen to US$56.64 and by 2008 it was up to US$99. It reached an all-time peak of $US147 a barrel in July of 2008.
The crash was supposedly caused by greedy bankers extending credit to unworthy house buyers. But they should have shared the responsibility with rising energy prices. The article reads, “The 2005 supply side shock was particularly profound because it impacted our primary energy source – oil. Look around your house and you will be hard pressed to find a single thing which was not made from oil; constructed using machinery powered with oil; or transported on vehicles that run on oil. So that when the price of oil increases so, too, does the price of everything else.”
This is what we can look forward to with the Clean Fuel Standard. The wrong idea at completely the wrong time.
Following 2008, central banks decided to switch strategies. Instead of letting the price shock of higher energy costs work its way through the economy, governments instead flooded capital markets with cheap money to keep the party going. This helped oil demand recover in 2009 and kept prices high for another five years. One quoted study from the article revealed that every dollar of economic growth reported this century has been accompanied by three times that much in debt.
Because the author is from the UK, the narrative focuses on the income disparity in that country. The parallels to Canada and the US are remarkable. Average wages in 2019 had not increased in a decade. “The metropolitan middle classes living in London and the archipelago of top-tier university towns continued to enjoy rising prosperity throughout the period. Meanwhile, large swathes of ex-industrial, rundown seaside and small-town Britain experienced declining standards of living. But since the establishment media, the permanent government and the various lobby groups are staffed by metropolitan middle classes, little thought was given to the needs of the majority whose living standards and future prospects were being crushed.”
This income disparity is what the article alleges caused the Brexit vote in the UK in 2016. This was the same source of the blue-collar voter support Donald Trump enjoyed in the 2016 US election.
This is also what has been going on in Canada for the past five years. Urban elites enjoying stable economic growth have been forcing their anti-oil agenda on the less populated, resource-producing regions of the country.
Record low interest rates caused other negative factors. Retirement investment yields began to plummet forcing investors to search for yield in things like junk bonds. “And one industry which reaped the benefit of this trend was US hydraulic fracturing.”
Accompanying this vast change in capital markets and economic behavior is the observation that it isn’t oil supply that has peaked but oil demand. While per capita oil demand is indeed declining, this is caused by steady growth in the denominator of this calculation, continued world population growth. This makes the penetration of renewable energy appear larger than it really is.
The point is that renewables have not replaced fossil fuels but augmented existing supplies because of continually growing global energy demand. And this growth is not coming from the wealthy countries. Pollution from OECD member nations that has been reduced because of more renewables and less coal consumption has been “outsourced” to Asia, where growing emissions have overwhelmed any reductions from Europe and North America for the past 20 years.
Expanding on this observation, the growth in manufacturing in China and Asia is not only aided by lower wages but also significantly lower energy costs. Developing countries are not forcing electricity prices much higher to reduce emissions like has happened in Ontario, California and several EU countries. This is also why the bread and butter industries that built the European and North American economics are being shuttered and more goods are manufactured abroad and imported.
The article questions the notion that there is actually any so-called energy transition occurring at all. Urban residents and influencers see electric cars, wind turbines and solar panels and figure there is some massive change underway and the end of oil is imminent.
In fact, all the trillions of dollars spent this century on renewables have supplied only a small percentage of the growing total energy demand. No fossil fuels have actually been replaced globally. Pre-COVID oil, gas and coal consumption data supports this view.
The summary of this argument is that peak oil has indeed arrived, with peak oil defined as the end of unlimited supplies of low-cost conventional petroleum. The new supplies that have come on stream since 2008 include Canadian oil sands and US shale oil.
Oil consumption growth has slowed not because of a change in the energy mix caused by substitution from renewables but a contraction in the purchasing power of everyday consumers. It reads, “…all of the central banks efforts at quantitative easing and ever lower interest rates have failed to resolve the consequences of peak oil. Not enough people have been left with disposable income (after the bills have been paid) to consume sufficiently to raise the price of oil to the point where the industry can remain profitable.”
At the same time the author comments, “While, from a metropolitan liberal perspective, this decline in demand for oil may look like a good thing, it actually points to a major unravelling of the global economy in the near future as much of the non-energy economy that we have constructed since the Second World War can no longer be sustained.”
Which is increasingly income redistribution and a growing services economy based on recycled government stimulus, not value-added, goods and wealth-creating industry.
The pandemic has made it worse. The solution to COVID has been for governments to borrow even more money, making the debt piled up since the 2008 crash appear modest by comparison. The price of oil is down in 2020 not because it is no longer required but because of government decree forbidding people to leave their homes to buy any.
In The Narrative Problem After Peak Oil, unless those driving public policy or public opinion understand what has happened to the world economy this century and the risks associated with propping it up with seemingly endless supplies of borrowed money, the future looks bleak.
Canada is blindly charging down this path. Rather than let the economy take advantage of the cheap energy currently available from the oil price collapse and let it recover on its own, through policies like the CFS governments intend to force higher energy prices on consumers who are already suffering from lower real disposable incomes and the massive economic fallout from the pandemic.
Politically, the growing number of people who have managed to align their jobs and incomes to the debt-fueled service economy and the phantom energy transition are forcing their aspirations on the rest of their fellow citizens in the resource and goods producing sectors.
Investigate what the CFS will do to agriculture and the price of food. And heat. And transportation fuels. The cost of everything will rise significantly while the economy is on its knees. What are these people thinking?
The Trudeau Liberal government is hell bent on inflicting further economic misery on Canada with policies and commitments that sell well to their urban voter base but will systematically damage the rest of the economy.
And our altruist sacrifices will not change the chemical composition of the global atmosphere (the science behind climate change) enough to make a measurable difference unless the rest of the world participates.
Which it won’t.
We can’t let this happen.
David Yager is an oil service executive, energy policy analyst, oil writer and author of From Miracle to Menace – Alberta, A Carbon Story. More at www.miracletomenace.ca