Invest in the right stimulus: Energy Independence

Stimulus is one of the buzzwords for 2009.  Every country that can afford it will be borrowing money to jump start the economy.  Canada is no exception.  You can be sure that when politicians try to spend money quickly, a considerable waste of your tax dollars will follow.  The ill-considered ideas will not be malicious; our esteemed leaders just don’t realize that the world has changed.

The economic problem facing us has its origins in financial weapons of mass destruction and the cost of oil.  Economists estimate the benefit of the recent drop in oil prices to the US at over $300 billion dollars.  That’s quite a stimulus package that Saudi Arabia has arranged for George Bush and his successor.  Our oil shock in 2008 is not the last one or even the worst that is coming.  We should expect another in 2010 or 2011 as soon as the economy revives.  Where will we find the funds for another multibillion stimulus program then?

Oil prices at $40 don’t support the kind of capital exploration budgets that are required to maintain supplies of oil and natural gas that are sapped by annual depletion.  A number of exploration companies are either selling for a loss or have shut down some production.  Most oil producers in Western Canada have cut their exploration budgets severely to survive.  The results of this under-investment will come back to haunt us.  The International Energy Agency warns that much larger investments are required to forestall disaster looming in the near future. Banks, being risk averse, remove credit where there is evidence of financial weakness caused by lower prices.

One of the things we seldom talk about is energy return on energy invested (EROEI) when contemplating investments for the future.  Looking back to the early days of oil production, it took one barrel of oil to bring 100 barrels of oil to market.  Today the ratio is much lower, so that the same barrel now only brings 10 from Saudi Arabia and probably only 3 barrels on average from the Alberta tar sands.  As we move into deep offshore wells like Brazil, we get costs in the $80 a barrel range.

So, our economy is increasingly being drawn into more investment for less energy output.  A blog entitled Calculated Risk http://www.calculatedriskblog.com/2008/07/us-energy-consumption-as-percent-of-gdp.html estimates that in 2008 energy costs jumped to 14% of US GDP as compared with a low of 6% in 1998.  A logical next step for Canada would be to actually invest in projects that would reduce our dependence on oil and other energy to the tune of 8% by conservation and substitution as a minimum starting point.  So far, one of the “replacements” for oil is corn-based ethanol.  Analysts unfortunately have concluded that with an EROEI of roughly 1.3, it takes almost a barrel of oil to produce a barrel of ethanol.  That’s hardly an investment strategy to get us off oil.

What about electric power generation from wind turbines?  They give roughly a 20x average return on energy.   For a coal-fired power plant, it’s 7.5 and a nuclear powered unit is just over five.  Hydro power plants are over 10, according to the Encyclopedia of Earth.  Photovoltaic is still expensive with a questionable return at the moment.

So, if you had $40 billion to spend, how would you create the most energy independence and oil immunity for Canada and as a side benefit create jobs?

As a longer-term strategy, how about re-building a railway freight and passenger service?  We could sure use a new national energy standard for new homes and a serious upgrading program for existing homes?

How about a national direct current electric power transmission line to efficiently move hydro power from BC, Manitoba, Quebec or Newfoundland to other areas.   What about a strategic oil reserve of perhaps 100 million barrels?  The purchase of oil with deferred delivery from hard-pressed Canadian producers would ease the pain in the Western oil patch from volatile prices.

Would we be better off with a national program of wind power development and support of hydro plans in Manitoba, Newfoundland, Quebec and BC?

I like to believe that our leaders will make choices that have an excellent energy return.  However, isn’t there a “Murphy’s law” about decision making time being inversely proportional to the cost of the project?  With $40B in play, we can expect some pretty dumb ideas in the near future.  When your local politician trots out the perennial choice of widening roads or building bridges to nowhere, one might ask them about the energy return on these $100 million a pop boondoggles.  Obviously, there is none.  In fact, the future of the personal automobile is in serious question if we don’t dramatically raise fuel efficiency.

But as a wise politician once said, “I’ll double cross that bridge when I get to it.”

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