When we can’t afford oil in Canada

Not so long ago the cost of gas was below our radar screens. Over the years our usage of oil has been increasing, with a number of oil analysts preaching in the wilderness that our profligate usage of oil is unsustainable and that a day of reckoning is coming soon. Those analysts are gaining more respect each day and that message will soon be the accepted wisdom. The average Canadian senses that there is a problem in the liquid fuels area but is unclear where this is all going. And to tell the truth, we don’t really want to hear the bad news. Isn’t life grand right now? Don’t worry, be happy!

Those “be happy” readers are advised to skip this column. For others who want a glimpse into the future, please continue reading. There is a great misunderstanding about the nature of the liquid fuel problem, which should be cleared up. Of all the planet’s riches that we are using up at a fantastic rate, oil is one of the most versatile and irreplaceable. It is a powerful source of energy that is mostly used in transportation – cars, ships, and airplanes but also in electric power generation.

There is a limited amount of oil on our planet. It is found in certain geological formations at considerable depth in the ground or under the ocean floor. With present technology, the chances of finding oil when drilling is considerable higher than in the past. For simplicity, we’ll use a round figure of 2000 Gigabarrels of ultimate recoverable reserves. The actual reserves may be more or less depending on whom you believe.

To understand why differing estimates exist, imagine being blindfolded with a straw inserted in a milkshake of unknown size. Based on the flow, you try to estimate how long the milkshake will last. Your friends stick other straws into the milkshake to attempt to find the edges of it, get more flow and a make a better estimate.

We know that the world is presently using roughly 82 million barrels a day or 30 Gigabarrels a year. Simple math (2000 / 30) would indicate 66 years before the oil runs out. Assumptions are that annual usage growth of 1.5 million barrels will cancel out discoveries over the long term. So where is the problem, you might ask?

The problem starts with the economist’s term “elasticity”. With most goods, if the price rises, we reduce our consumption. This reduced consumption, in turn, moderates prices. However, when oil prices rise, we still fill up because we need our cars to go to work, to shop and to heat our homes.

Where can we immediately cut our consumption of oil and gas? Public transit may not be possible. We need our lettuce from California and oranges from South Africa. We can’t re-insulate immediately. We can’t shut down our oil furnace during the winter. Can we change our SUV quickly for a small Honda Civic? We can’t do it. So oil demand is inelastic. We have all been complaining about the price of oil going to $75 a barrel but how many of us have actually cut our oil consumption? Anyone?

The second part of the problem is that oil flow from a well eventually starts declining. Doesn’t that make sense? At present major oil companies are having difficulties maintaining production at current levels and covering for growth of demand in China and India. As production from existing fields declines, it has to be replaced by new discoveries and they are not so common as before. New drilling is taking place in deeper water that is costlier. Unconventional sources like oil sands in Alberta are being tapped but they too are expensive, energy intensive to extract and not too good for the environment.

When oil production peaks and we won’t know until after it happens, a seller’s market will exist and oil prices will go to heights like nothing we have seen before. And that is when we won’t be able to afford oil in Canada. Next, Energy Matters! looks at when oil may peak.

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