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Two weeks ago, there was a global affairs forum at a local church, and I attended in order to watch a presentation on the Alberta Tar Sands project.   Although the project is taking place in Canada, the environmental impact may end up being global, so that’s why it was included in the forum.    Jeff Green, who is a member of the Climate Reality Project, introduced a video documentary by Andrew Nikiforuk, a journalist based in Calgary, who has written a book on the project called Tar Sands:  Dirty Oil and the Future of a Continent.

To be honest, based on the title of his book, I thought the presentation was going to be on the environmental impact of the Alberta Tar Sands project, both in terms of the local pollution caused by the mining, and in terms of the possible impact on global warming if once the final oil products are consumed by an energy-hungry world.    What emerged in the documentary was a more integral look at the various risks, societal, economic, and political, in addition to the environmental risks that I had expected to hear about.   Yes, having the resources in Canada is a blessing to a certain extent from an economic standpoint, which is the positive risk or opportunity side of the equation.    But is there a full accounting of the potential negative impacts on the society of Canada?   This post is a summary of the 10 points made by Andrew Nikiforuk in his documentary, which attempts to answer this question.

There needs to be a national debate about the pace and scale of the project, according to Mr. Nikiforuk.   He recommends that people listen to the advice of former Prime Minister Peter Lougheed, a conservative, who said this in 2006 about the project, “slow down, behave like an owner, collect your fair share, save for a rainy day, and clean up the mess.”

Here is a survey of 10 risks that need to be considered when discussing the full impact of the Alberta Tar Sands project.

1.  Bigness (and brittleness)

This project is one of the largest and more complex engineering projects in history.    The resource, which is the world’s 2nd largest reserve of hydrocarbons, can be found underneath an expanse of forest the size of Florida.    The earth removed to get at the resource since the 1970s would fill 7 Panama Canals.   Many of the individual mining projects that make up the entire project are themselves the size of small-to-medium size cities.    The entire surface area of the project covers 1.6 million hectares, the equivalent of 20 cities the size of Calgary, 40 cities the size of Denver, or 17 cities the size of Berlin, and it will produce 6 billion barrels of toxic waste (1 barrel of bitamen extracted produces 1.5 barrels of mining waste).    According to the RiskMetrics Group, it would cost $20 billion just to separate the water in the toxic waste from the sand and the clay.

70% of the oil in the United States now comes from Canada, with the majority of that oil coming from the tar sands in Alberta.    It comes from Canada through an enormous pipeline complex, which is being proposed for expansion, from Alberta through British Columbia to the West, and down through to Texas in the United States.

The brittleness of big things is startling–there was a pipeline break on the  Kalamazoo River in July 2010 that released a million gallons.    This oil  spill cost Enbridge, the company that operated the pipeline, half a billion dollars to clean up.    This one leak caused the price of oil to go up $10, and caused the shutdown of between 6 and 8 refineries in the Midwest, and $340 million lost revenue to Alberta.

Nassim Nicholas Taleb was a derivatives trader and “quant” trader before starting a full-time career as a scholar of applied probability and risk.    His theme is that “big things fail,” and he was one of those who predicted the failure of the banking industry in 2008.    He says that “Mother Nature is robust.   Large modern corporations are fragile.   No government can fortify something that’s inherently fragile.   Leopold Kohr, an economist, wrote in the 1970s and 1980s that “There seems to be one cause of social misery:  bigness … whenever something is wrong, it is too big.”

2.   Energy Security

340,000 people in Canada have moved from Eastern Canada westward to Alberta in order to work in the Alberta Tar Sands project.    Yet where is the oil consumed in Canada itself coming from?   It is coming from Algeria, Iraq, and Saudi Arabia.   Canada in fact is more dependent on foreign oil now than the United States (which is 70% dependent on oil imports).     One of the problems with energy exports to the United States comes from the NAFTA trade agreement.    The heavy crude oil cannot be moved south through the pipeline unless the it is diluted with some sort of oil-based diluent or condensate.    The supply of diluent from North America has run out, so now 210,000 barrels a day have to be imported from the Middle East and Venezuela.    Bitumen is a product made in North America, but when it is diluted with condensate from outside of North America, U.S. Customs makes the argument that it is no longer a North American product, and may face higher import duties for that very reason.

3.  Oil Price Shock Vulnerability

Bitumen is one of the world’s most expensive hydrocarbons.   It requires a world price of between $60-80 per barrel of oil in order for the production to be profitable.    Whenever the oil price drops to $30/barrel, the production in the oil sands in North America is going to drop first because it is the most economically marginal oil product.    This happened in 2008, when tens of thousands of Canadians were laid off from the tar sands project, and $150 billion worth of projects were cancelled.    Most of the economic recessions in the past few decades were due to oil price shocks.    The more the Canadian economy is tied to oil production, the more vulnerable it will be to future oil price shocks.

According to a study by the C. D. Howe Institute called Energy Prices and Alberta Government Revenue Volatility, the government of Alberta’s revenue stream has been and continues to be the most volatile out of any jurisdiction in Canada.    They said, “volatile revenues usually leads to volatile government expenditures … and the inefficient provision of government services.”

4.   The “Dutch Disease”

The “Dutch Disease” is an expression that the Economist magainze gave to the results of  to the discovery or natural gas by Holland in the 1970s.    They exported it, and it not only drove the exchange rate of the guilder way up, but the manufacturing and agricultural sectors found it very hard to compete with the petrochemical sector, and they ended up languishing.    Likewise in Canada, the manufacturing and agricultural sectors have experienced a decline.    For example, in the manufacturing sector, 340,000 jobs have been lost in the past 6-8 years.    Not all of that loss is due to the tar sands project, but a good portion of it is.    Investments in the manufacturing sector are declining as well.    The Canadian Real Estate Association or CREA concluded in 2009 that “54 percent of the manufacturing employment loss due to exchange rate develop between 2002 and 2007 are related to a Dutch disease phenomenon.”    Andrew Nikiforuk sees the “hollowing out” of the economy as a process that will only continue unless there is a policy response to counteract it.

Canada has traditionally taken its natural resources, such as fish (like codfish), wood (like white pine), and exported it “raw” without any processing or additional value added.     More than half of the bitumen exported to the United States is raw or unprocessed.   Americans are the ones who turn it into diesel fuel or jet fuel and make most of the profits.    The export of 400,000 barrels of raw bitumen to the United States without further processing is therefore the equivalent of exporting 18,000 jobs to the United States.

5.  Petro Politics

Terry Karl, the political scientist from Stanford University who has studied petrochemical states, said “Petro-states rely on an unsustainable development trajectory fueled by an exhaustible resource–and the very returns produced by this resource form an implacable barrier to change.”    The only democracies in the Middle East, Lebanon and Israel, have no oil; the rest are petrochemical states.   A lot of people in the West see the lack of democracy in the Middle East as stemming from a problem with the culture (Samuel Huntington’s Clash of Civilizations, for example), but Mr. Nikiforuk thinks that the reason lies in the simple fact that the governments have been subverted and distorted by oil revenue, which in turn has been utilized by authoritarian regimes to extend their period of rule.

There are left-wing petro states (Venezuela) and right-wing petro states (Alberta); but the government structure in both places has many parallels.   25% of the revenue of Alberta comes from oil, the same figure as for Libya and Norway.   What do petro states do?    They

• Lower taxes
• Overspend revenue
• Concentrate power
• Extend long rule

The Alberta premier who ruled for 14 years was referred to by the nickname of “King Ralph.”   Sarah Palin, the governor of Alaska and Vice Presidential Candidate for the 2008 election, was very much in the mold of the ruler of a petro state.    In Mexico, the oil revenue was used by the PRI to extend its rule for 70 years; Muammar al-Qaddafi ruled Libya for 42 years, and the Alberta Progressive Conservative Party ruled for 40 years.    One party rule on the basis of access to oil wealth.

I will continue with part 2 of this post covering risks 6 through 10 one week from today.

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