By Peter Smith, Board of Directors, Sierra Club Canada Foundation
Author Upton Sinclair once said 'It is difficult to get a man to understand something, when his salary depends on his not understanding it', and that is certainly the case when the oil industry considers global warming. For an industry that measures its asset value by the volume of oil it has in the ground, the idea of not burning all that oil is nothing short of blasphemy. Until recently the industry has maintained a common front: ignore global warming; claim it isn’t happening; blame it on something else and finally pretend that it will take too long and cost too much to change now.
So eyebrows were raised last week when Suncor CEO, Steve Williams,announced that they had asked the Alberta government if they could leave some of their bitumen in the ground if it proves too expensive to extract or results in excessive emissions. The Alberta licences require oil companies to extract virtually all the material on their properties. The theory being, that as those resources are extracted over time the price of oil will increase to the point where even the most uneconomic deposits will become economic one day. Sound economics if you believe oil to be a limited resource with an ever increasing future demand. But the realization is starting to creep in that the days of ever increasing demand forecasts may be over.
Nowhere is this better illustrated than in Saudi Arabia, home of the world’s largest oil deposits and lowest extraction costs. In the past Saudi Arabia would tighten the supply spigot every time oil prices dipped in order to maintain high revenues. Today they are doing the exact opposite, flooding the market with cheap oil. In their recently announced “Vision 2030” the Saudi government stated its intention to get the economy off oil (which presently makes up 50% of GDP and 80% of government revenues) by 2030. Until then, the plan seems to be to sell as much oil as possible while there is still a market for it. They are not alone in that approach.
The oil companies face a huge problem which they have, so far, simply denied exists, the so-called “Carbon Bubble.” If they suddenly admit that they will never be able to extract and sell all that oil, then the value of these companies will plummet and stock markets will take a huge hit perhaps triggering a recession. If they could just admit that some of that oil will remain in the ground then they could start a gradual write-down of assets and avoid a sudden shock. This may be exactly what Suncor, one of the more progressive companies in the carbon club, is doing. Time will tell, if others follow suit and if Suncor continues with a structured write-down.
So what does all this mean for the environment? This announcement won’t reduce oil consumption or emissions by one drop, that oil would have stayed in the ground for decades anyway. However, I think it is a signal that the industry is starting to come to terms with reality, the first brick in the wall has crumbled, and others will follow. They may never admit it, and they are going to continue delaying meaningful reductions in consumption for as long as they can, but this does signal a change for the better. No government wants to cause a market slump, but we still need them to take the actions necessary to meet the climate goals. Getting the oil companies to slowly deflate the Carbon Bubble will make it easier for governments to pursue their emissions goals.
Peter Smith is a retired professional engineer, with over 40 years experience in the energy industry, and a specific interest in avoiding climate catastrophe by transitioning to renewable sources of energy. Peter is a Director of Sierra Club Canada Foundation and chairs our Nominations Committee. If you would like to volunteer or nominate a member to sit on our Board of Directors please go here. The deadline for nominations is August 31, 2016.