It’s not its carbon trail that stands in the way of the Alberta tar sands’ picking up the supply ball dropped by deep-water drilling in the Gulf of Mexico. After all, tar sands fuel is no dirtier than coal, and Americans haven’t let that fossil fuel’s carbon trail stand in the way of its generating almost half of their electrical power. If America is going to ban tar sands fuel, why doesn’t it ban coal as well?

Double standards aside, though, Congressman Waxman and Governor Schwarzenegger needn’t worry about growing American dependence on dirty tar sands fuel. TransCanada Corp.’s proposed Keystone XL pipeline, connecting as much as 900,000 barrels a day of oil from the tar sands to Texas refineries, isn’t going to have much flowing in it if oil prices stay where they are today.

Even without a cost for carbon emissions or water pollution, the economics of the requisite production increases just won’t fly. Not when the cost curve lying between today’s production of a little over one and a quarter million barrels a day and tomorrow’s target of three million barrels a day is steeply ascending, driven by the need to pursue ever-deeper bitumen deposits even further away from available water sources like the already heavily tapped Athabasca River. As energy guru Matthew Simmons once wryly observed, “In oil exploration, you don’t leave the easiest for the last.” It’s not a coincidence that two of the largest and oldest producers, Syncrude and Suncor, are located almost kitty-corner from each other across the banks of the Athabasca.

The Alberta tar sands are not a new discovery. As early as 1920, there was a pilot plant that first extracted oil from the bitumen. The only thing new about the tar sands is that they are now considered a commercially viable source of oil supply. Until the oil prices of the last several years, they most definitely weren’t.

And they still won’t be if prices retreat to where American motorists would like them. If you doubt that, just look at what happened in Alberta’s tar patch during the last recession, when oil prices plunged to $40 per barrel. Some $50 billion of capital spending was cancelled overnight. The stampede to the exit doors was as frantic as the earlier rush in, when oil rose to almost $150 per barrel.

America isn’t the only customer for the fuel, either. Sinopec and the China National Offshore Oil Company (CNOOC) have made substantial investments in the tar sands recently. And Enbridge wants to circumvent American carbon opposition and build a pipeline to get things flowing to the Pacific coast at Kitimat, B.C., for transoceanic shipment to China.

Many have questioned whether the expansion plans for Alberta’s tar sands are environmentally sustainable. But what potential American or Chinese customers must realize is this: without their paying ever-rising prices for that fuel, the tar sands may not even be economically sustainable.

  • Gustaf

    But you expect higher prices, right?

  • Gustaf

    But you expect higher prices, right?

  • Goneclimbing

    I agree with Gustaf, you make the case for higher oil prices in your whole book and all interviews I've seen you in. Not sure the point of this post…

  • Newfie

    Oil prices can only rise so high. Too high and they choke off economic growth and the economy stalls and sputters (like it is doing now). The price of oil is inherently self limiting. Virtually every enterprise assumes a business-as-usual supply of “affordable” oil. So I'm not convinced of Jeff's argument here. Me-thinks oil prices will remain about where they are now and perhaps rise a little bit if production declines or demand increases but I doubt that oil prices will go very low again – too many new car buyers in Asia, etc.

  • Holmespainting

    If America doesn't want Albertas oil, then Alberta will gladly deal with China. In a decades time that country will eclipse what Americas need is. China and other countries will invest quite heartily up here and look to other more affordable and yes “greener” ways to extract the “dirty” oil. Since when is oil “green” in the first place? This green movement should shoot itself in the foot. Its all rhetoric hyped up by the media. Despite Kyoto targets and worthless economic summit agendas, they will measure the worlds greenhouse gases in the years to come and nothing will make a difference so long as we depend on oil to survive.Blame the Third World for it. They think nothing of environmentalism, they only worry about food on the table. Any economy can't survive without oil. I really wish America gets its facts straight. I have worked in the tarsands and it is NOT what you think. The resource is sustainable. It does not need to be at $100 plus to be so. It is not some festering sore on Canadas ass. If the oil runs out in Saudi Arabia, your chief supplier, you will rely on us more than ever.

  • 1Eco_Indigo_1

    Excuse my cynicism, but i offer the following for digestion:

    I think china views the U.S as a strategic competitior, and is following its classical strategies of taking the U.S down without fighting it head on. Chinese investment in the oil sands is simply to deny U.S control of them, should the U.S seek to use it as the main source of oil. Its chilling to consider this prospect, but if you look at it from Chinas point of view, there are potentially 20 million barrels of oil a day that become available if the U.S were to suffer a catastophic financial crash, and if the U.S went down, the extra oil would lower prices, and china could mop it all up because they have the cash/commodities to exchange for it. very clever.

    China are locking up the resources for nuclear power, have the rare earths for wind power, and the manufacturing capability for solar, not to mention the land management skills of 900 million self sustaining peasants, who if they turned to growing hemp, and converted it to methanol, would become pretty well off in terms of earthly wealth. I think the key is connection with nature and ability to get the most beneficial exchange from it, and the chinese culture is pretty good at it, apart from the odd famine every now and then.

    Industrial hemp could offer a source of energy to offset crude oil production decline, but there seems to be a lack of real momentum to get it implemented large scale, which is needed to ensure there are no shortages. Surely there are some capitalists out there who see the opportunity?

  • Karlin

    TransCanada's CEO is retiring this year. It looks like he chose a good time to get out!!

    One conundrum here is that if oil prices were higher, renewable energy looks better and that could save the planet a bit of trouble. However, if prices go or stay high, the Tar Sands will expand and the planet will be in more trouble.

  • elizabeth

    I remember growing up with the dirty black lumps of coal my parents uesd to heat the home
    we kepted a big wood blue box in our porch filled with coal and its really dirthy…get any on your clother and try to remove the dirtty stuff.. I myself didn”t like adding the coal to the kitchen stove I thought it was so dirty and messy .at night dad would fill yhe kitchen stove and the coal would burn all night and give off so much heat heat, yes coal has it”s positives and negatives like the Tar Sands and like everythung else in life today ..Electricty is going sky high in price add that to pluggin in the electric car ..there is no winwin solution here its all going up in price if we use it or not and some young teen down the road is going to invent other means of fuel but not in out time..

  • Bluetown

    Great book; great writing!

    One two factors that i saw missing from Jeff's equation(or missed making the connections with) were drugs and weapons. I'm not necessarily taking about Afghanistan or Iran, though those would/should definately factor in, but what about Mexico? Lost of drugs, takes gas to move them; and weapons, petroleum byproducts. How much does what goes on with the US and the Mexican cartels effect the supply and demand equation and how does that long term picture play out?

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  • db

    Classic strategy aside I doubt a drought prone country like China will suddenly take up hemp production to offset the decline in crude. More likely a world wide phenomenon of oscillating cycles of demand destruction, liquidity pumping by government, deflation, inflation will continue until world consumption of energy resets to a lower sustainable level. We need to decide as a civilisation whether it will be painful and violent or somewhat progressive… renewables can help with the transition but only if we ratchet down consumption.

  • db

    Except there will be a lag between the price peak and the reaction in the economy to that peak and that reaction will happen at different times around the world. Suppose oil hits $200 USD… the inflationary effect might be immediately felt by an American but commodity producing countries might have the effect cushioned by their appreciating currency, which makes imports from the US more affordable which improves their trade balance. So oil could hover around this 'test' peak for a few months, maybe a year before the economy reacts, suddenly curtails consumption, GDP drops like a stone in a vacuum and suddenly energy prices drop in lockstep. I think the amplitude of price oscillation will start to increase over time (increased volatility) though I'm not convinced oil will rise past the previous $147 test peak.

  • Bla Bla

    Jef you rock! Endnoten are the best!!!!!