Alberta Bitumen Bubble and The Canadian Economy: Revisiting My Industry Analysis Case Study

Bitumen prices are low because the province has ignored at least a decade of warnings.

Over five years ago now, March 11, 2013, I published this mayo615 blog post on the Alberta bitumen bubble, and the budgetary problems facing Alberta Premier Alison Redford, and the federal Finance Minister Jim Flaherty at that time, both of whom were surprisingly candid about the prospect for ongoing long-term budgetary problems for both the Alberta and Canadian national economies. Fast forward five years to today and the situation has essentially worsened dramatically.  The current Alberta Premier Rachel Notley is facing another massive budget deficit, just as Alison Redford predicted years ago, and was forced to call a new election. My most glaring observation is that despite years of rhetoric and arm-waving, almost nothing has changed. Meanwhile, the Canadian economy is on the precipice of a predicted global economic downturn which could easily become a global financial contagion.

READ MORE: Alberta Bitumen Bubble And The Canadian Economy 

Today, the Tyee has published an excellent article detailing how and why this trainwreck of Alberta fossil fuel-based economic policy developed, and has persisted for so long without changing course.

Source: Alberta’s Problem Isn’t Pipelines; It’s Bad Policy Decisions | The Tyee

In 2007, an Alberta government warned that bitumen prices could eventually fall so low that the government’s royalty revenues — critical for its budget — would be at risk. Photo via the Government of Alberta. 

 

The Alberta government has known for more than a decade that its oilsands policies were setting the stage for today’s price crisis.

Which makes it hard to take the current government seriously when it tries to blame everyone from environmentalists to other provinces for what is a self-inflicted economic problem.

In 2007, a government report warned that prices for oilsands bitumen could eventually fall so low that the government’s royalty revenues — critical for its budget — would be at risk.

The province should encourage companies to add value to the bitumen by upgrading and refining it into gasoline or diesel to avoid the coming price plunge, the report said.

Instead, the government has kept royalties — the amount the public gets for the resource — low and encouraged rapid oilsands development, producing a market glut.

With North American pipelines largely full, U.S. oil production surging and U.S. refineries working at full capacity, Alberta has wounded itself with bad policy choices, say experts.

The Alberta government and oil industry is in crisis mode because the gap between the price paid for Western Canadian Select — a blend of heavy oil and diluent — and benchmark West Texas Intermediate oils has widened to $40 US a barrel.

Some energy companies have called on the government to impose production cuts to increase prices.

The business case for slowing bitumen production was made by the great Fort McMurray fire of 2015.

The fire resulted in a loss of 1.5 million barrels of heavy oil production over several months. As a result, the price of Western Canadian Select rose from $26.93 to $42.52 per barrel.

Premier Rachel Notley has appointed a three-member commission to consider possible production cuts, something Texas regulators imposed on their oil industry in the 1930s to help it recover from falling prices due to overproduction.

Oilsands crude typically sells at a $15 to $25 discount to light oil such as West Texas Intermediate. It costs more to move through pipelines, as it has to be diluted with a high-cost, gasoline-like product known as condensate. According to a recent government report, it can cost oilsands producers $14 to dilute and move one barrel of bitumen and condensate through a pipeline.

And transforming the sulfur-rich heavy oil into other products is more expensive because its poor quality requires a complex refinery, such as those clustered in the U.S. Midwest and Gulf Coast.

But the growing discount has cost Alberta’s provincial treasury dearly because royalties are based on oil prices.

Earlier this year, an RBC report pegged the loss at $500 million a year, while a more recent study estimates the losses could be as high as $4 billion annually.

While a few oilsands companies such as heavily indebted Cenovus say they are losing money due to the heavy oil discount, others are making record profits and say no market intervention or change is necessary.

The difference is those companies heeded the decade-old warnings and invested in upgrades and refineries to allow them to sell higher-value products.

Canada exports about 3.3 million barrels of oil a day. About half of that is diluted bitumen or heavy oil.

And the current dramatic price discount has divided oilsands producers into winners and losers.

The winners invested in upgrades and refineries, while the losers are producing more bitumen than their refinery capacity can handle or the market needs.

During Alberta’s so-called bitumen crisis, the three top oilsands producers — Suncor, Husky, and Imperial Oil — are posting record profits.

All three firms have succeeded this year because they own upgraders and refineries in Canada or the U.S. Midwest that can process the cheap bitumen or heavy oil into higher value petroleum products.

Imperial Oil, for example, boosted production at its Kearl Mine to 244,000 barrels in the most recent quarter but refined and added value to that product.

As a result, its net income for the quarter doubled to $749 million.

CEO Rich Kruger said that the collapse in bitumen prices was not a concern.

“Looking ahead, in the current challenging upstream price environment, we are uniquely positioned to benefit from widening light crude differentials,” he stated in a press release.

Suncor also reported that most of its 600,000-barrel-a-day production is not subject to the price differential because it upgrades the junk resource into synthetic crude or refines heavy oil into gasoline.

In its most recent business report, Husky reported a 48-per-cent increase in profits as cheap bitumen has fed its refineries and asphalt-making facilities.

The Alberta government knew this was coming.

A technical paper on bitumen pricing for Alberta Energy’s 2007 royalty review warned the province about the perils of increasing production without increasing value-added production.

“Bitumen prices, when compared to light crude oil prices, are typified by large dramatic price drops and recoveries,” it noted. Between 1998 and 2005, “bitumen prices were 63 percent more volatile than West Texas Intermediate prices,” it said.

Two things are apparent from the bitumen (BIT) and West Texas Intermediate (WTI) price series shown above. First, bitumen prices, when compared to light crude oil prices, are typified by large dramatic price drops and recoveries. In fact, over the period shown, bitumen prices were 63 percent more volatile than WTI prices. Image from 2007 Alberta government report.

The analysis added that “for bitumen to attract a good price, it needs refineries with sufficient heavy-oil conversion capacity.”

The province’s push to develop the oilsands quickly increased the risk, the report said. “Price volatility for bitumen, especially the extremely low prices that have been witnessed several times over the past several years, is the most obvious risk.”

And the report noted that increasing bitumen production posed “a revenue risk for the resource owner” — the people of Alberta. When the differential widens, Alberta makes less money on its already low royalty bitumen rates.

Companies can compensate for the price risk by buying or investing in U.S. refineries; securing long-term pipeline contracts; investing in storage or using contracts to protect them from price swings.

Many oilsands producers, including Suncor, Imperial, and Husky, have lessened their vulnerability to bitumen’s volatility by doing all of these things.

But the provincial government is more exposed to price swings, the report said.

“For the province, the variety of risk mitigation strategies that can be pursued by industry is generally not available. Therefore Alberta is absorbing a higher share of price risk, particularly where royalty is based on bitumen values.”

In 2007 Pedro Van Meurs, a royalty expert now based in Panama warned the government that its royalty for bitumen was way too low in a paper titled “Preliminary Fiscal Evaluation of Alberta Oil Sand Terms.”

Van Meurs noted that upgrading considerably enhances the value of bitumen and would generate more revenue for the province.

But that did not appear to be the policy the government was pursuing, warned Van Meurs in his report to the government.

Low royalties “raise the issue whether it is in the interest of Alberta to continue to stimulate through the fiscal system such very high-cost production ventures,” wrote Van Meurs, a chief of petroleum developments for the Canadian government in the 1970s.

Charging higher royalties would not only slow down production and avoid cost overruns in the oilsands but also encourage “upgrading projects with higher value-added opportunities,” he wrote.

But Alberta succumbed to sustained oil patch lobbying in 2007 and ignored Van Meurs’ advice.

As a result oilsands royalties remained low and there was little incentive for companies to add value or build more upgraders and refineries.

In 2009 the province’s energy regulator said in an annual report on supply and demand outlooks that low bitumen prices were a direct consequence of overproduction.

Planned additions for upgrading and refining would resolve the problem in the future.

But after the 2008 financial crisis, planned upgrades in Alberta did not materialize.

With no provincial policy encouraging value-added processing, the industry took a strip-it-and-ship-it approach on bitumen and depended solely on pipelines to deal with overproduction.

Robyn Allan, an independent B.C. economist and former CEO of the Insurance Corporation of British Columbia, says the 2009 report by the energy regulator clearly shows the Alberta government knew the risks of overproduction.

“It won’t matter how many pipelines are built if oil producers continue to increase the amount of low-quality product they pump from the oil sands. Pipelines do nothing to improve quality and with new regulations on sulfur content, the world is telling us the downward pressure on heavy oil prices will only get worse,” said Allan.

In 2017, only 43 percent of the bitumen produced was actually upgraded in Canada while 57 percent was shipped raw to U.S. refineries.*

Sorry Alberta, BC Will Not Pay for Your Bungling

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As bitumen prices plunged this year, U.S. refinery margins jumped to record levels.

According to a Nov. 6 article in the Wall Street Journal, Phillips 66, a major buyer of cheap Canadian bitumen, ran its refineries at 108 percent of capacity and was “earning an average $23.61 a barrel processed there.” Profits jumped to $1.5 billion, an increase of 81 percent over last year.

“U.S. refining has really gone from being a dog to being a fairly attractive business model,” one consultant told the Wall Street Journal. “I don’t think that’s going to change any time soon.”

Another beneficiary of Alberta’s no-value-added policy has been the billionaire Koch brothers.

They own the Pine Bend refinery in Minnesota, which turns more than 340,000 barrels of Canada’s crude into value-added products every day.

A widening of the price discount of heavy oil by just $15 adds an additional $2 billion in windfall profits a year for Koch Industries, one of the most powerful companies in North America.

The risks of Alberta’s policy of shipping raw bitumen to U.S. refineries was outlined again during the province’s 2015 royalty review, which like the 2007 report, resulted in little change due to successful industry lobbying.

In 2015, Barry Rogers of Edmonton-based Rogers Oil and Gas Consulting warned the government that low royalties for bitumen simply encouraged the industry to export the heavy oil to U.S. refineries with no value added in Canada.

“By not charging a competitive fiscal share Alberta is, in fact, subsidizing the industry. This gets government directly into the business of business and removes the benefits of market-priced signals — leading to reduced innovation, higher costs, reduced competitiveness, a transfer of economic rent from resource owners to industry and reduced economic diversification.”

Rogers added that the current policy might benefit a few powerful companies but was “a disaster for the overall industry, and, therefore, a disaster for Alberta — both for current and future generations.”

Norway Deals With Its “Natural Resource Curse” While Canada Does Nothing

CBC’s The National has tonight broadcast a public debate titled “The Politics of Oil” on the current oil economy crisis in Canada. A key issue exposed tonight was the contrast between Canada’s national policies on oil wealth and Norway’s.  In the 1990’s both Canada and Norway debated how to manage oil wealth and created funds to invest for future economic development. Today, Norway’s national saving fund is worth $1.03 Trillion while Canada’s, actually Alberta’s fund, is worth only $17 Billion, and has barely increased since the late 1990’s.

I blogged on this topic on May 27th of 2013. My original post is republished here:

INDUSTRY ANALYSIS: NORWAY DEALS WITH IT’S “NATURAL RESOURCE CURSE” WHILE CANADA DOES NOTHING

In my earlier post on March 11th, 2013 , “Alberta Bitumen Bubble and the Canadian Economy: An Industry Analysis Case Study,” I reported the stark facts of Canada’s current economic crisis as announced by Canada’s Minister of Finance, Jim Flaherty, and Alberta Premier Allison Redford, directly resulting from pricing forecasts for “Western Canada Select” (WCS) from the oil sands. In that post I also explored the now well-established economic conundrum known as the “natural resource curse.”  This simply means that economies that rely heavily on natural resource exploitation, have historically underperformed more diverse economies. This is now most certainly the case in Canada.Read more: http://mayo615.com/2013/03/11/alberta-bitumen-bubble-and-the-canadian-economy-industry-analysis-case-study/In another excellent Globe & Mail article published May 16th, the author details how Norway dealt with its “natural resource curse,” and has diversified its economy with the government proceeds of its oil wealth.  By contrast, Canada’s current Conservative government prefers a laissez-faire approach to the future, taking no action.  In the opinion of most economists who monitor natural resource based economies, this is a recipe for disaster in Canada.  So again the discussion question is: in such a situation, what would you do to address this crisis for the Canadian economy?Read more: http://www.theglobeandmail.com/report-on-business/economy/canada-competes/what-norway-did-with-its-oil-and-we-didnt/article11959362/When oil was discovered in the Norwegian continental shelf in 1969, Norway was very aware of the finite nature of petroleum, and didn’t waste any time legislating policies to manage the new-found resource in a way that would give Norwegians long-term wealth, benefit their entire society and make them competitive beyond just a commodities exporter. “Norway got the basics right quite early on,” says John Calvert, a political science professor at Simon Fraser University. “They understood what this was about and they put in place public policy that they have benefited so much from.”This is in contrast to Canada’s free-market approach, he contends, where our government is discouraged from long-term public planning, in favour of allowing the market to determine the pace and scope of development.“I would argue quite strongly that the Norwegians have done a much better job of managing their [petroleum] resource,” Prof. Calvert says.While No. 15 on the World Economic Forum’s global competitiveness rankings, Norway is ranked third out of all countries on its macroeconomic environment (up from fourth last year), “driven by windfall oil revenues combined with prudent fiscal management,” according to the Forum.Before oil was discovered, the Act of 21 June 1963 was already in place for managing the Norwegian continental shelf. This legislation has since been updated several times, most recently in 1996, now considered Norway’s Petroleum Act, which includes protection for fisheries, communities and the environment.In 1972, the government founded the precursor of Statoil ASA, an integrated petroleum company. (In 2012, Statoil dividends from government shares was $2.4-billion). In the same year, theNorwegian Petroleum Directorate was also established, a government administrative body that has the objective of “creating the greatest possible values for society from the oil and gas activities by means of prudent resource management.”

In 1990, the precursor of the Government Pension Fund – Global (GPFG), a sovereign wealth fund, was established for surplus oil revenues. Today the GPFG is worth more than $700-billion.

While there’s no question that Norway has done well from its oil and gas, unlike many resource-based nations, Norway has invested its petro dollars in such a way as to create and sustain other industries where it is also globally competitive.

The second largest export of Norway is supplies for the petroleum industry, points out Ole Anders Lindseth, the director general of the Ministry of Petroleum and Energy in Norway.

“So the oil and gas activities have rendered more than just revenue for the benefit of the future generations, but has also rendered employment, workplaces and highly skilled industries,” Mr. Lindseth says.

Maximizing the resource is also very important.

Because the government is highly invested, (oil profits are taxed at 78 per cent, and in 2011 tax revenues were $36-billion), it is as interested as oil companies, which want to maximize their profits, in extracting the maximum amount of hydrocarbons from the reservoirs. This has inspired technological advances such as parallel drilling, Mr. Lindseth says.

“The extraction rate in Norway is around 50 per cent, which is extremely high in the world average,” he adds.

Norway has also managed to largely avoid so-called Dutch disease (a decline in other exports due to a strong currency) for two reasons, Mr. Lindseth says. The GPFG wealth fund is largely invested outside Norway by legislation, and the annual maximum withdrawal is 4 per cent. Through these two measures, Norway has avoided hyper-inflation, and has been able to sustain its traditional industries.

In Norway, there’s no industry more traditional than fishing.

“As far back as the 12th century they were already exporting stock fish to places in Europe,” explains Rashid Sumaila, director of the Fisheries Economics Research Unit at the University of British Columbia Fisheries Centre.

Prof. Sumaila spent seven years studying economics in Norway and uses game theory to study fish stocks and ecosystems. Fish don’t heed international borders and his research shows how co-operative behaviour is economically beneficial.

“Ninety per cent of the fish stocks that Norway depends on are shared with other countries. It’s a country that has more co-operation and collaboration with other countries than any other country I know,” Prof. Sumaila says.

“That’s [partly] why they still have their cod and we’ve lost ours,” he adds, pointing out that not only are quotas and illegal fishing heavily monitored, policy in Norway is based on scientific evidence and consideration for the sustainability of the ecosystem as a whole.

Prof. Sumaila cites the recent changes to Canada’s Fisheries Act, as a counter-example: “To protect the habitat, you have to show a direct link between the habitat, the fish and the economy,” he says, adding, “That’s the kind of weakening that the Norwegians don’t do.”

Svein Jentoft is a professor in the faculty of Bioscience, Fisheries and Economics at the University of Tromso. He adds that Norway’s co-operative management style, particularly domestically, has been key to the continued success of the fisheries.

“The management system [for fish stock] is an outcome of the positive, constructive and trustful relationship between the industry on the one hand and the government on the other hand,” Prof. Jentoft says. “They have been able to agree on issues that you and many other countries haven’t been able to, largely because the government has listened to the fishermen.”

However, Prof. Jentoft isn’t on board with all of his government’s policies. He’s concerned about how the quota and licensing system is concentrating wealth and the impact that this will have on fishing communities.

He predicts that Norway’s wild stocks will remain healthy in the foreseeable future and that the aquaculture industry (fish farms), where Norwegians are world leaders, will continue to grow.

In 2009, Norway’s total fish and seafood export was $7.1-billion, $3.8-billion was in aquaculture. By 2011, Norwegian aquaculture exports grew to $4.9-billion. In Canada, total fish and seafood exports in 2011 were $3.6-billion, with approximately one-third from aquaculture.

Norway’s forests are another important natural resource, and its pulp-and-paper industry has many parallels to Canada’s. Both nations are heavy exporters of newsprint. With much less demand since the wide adoption of the Internet and competition from modern mills from emerging markets, both nations have suffered through down-sizing and mill closures over the past decade. Both have been looking for ways to adapt.

The Borregaard pulp and paper mill in Sarpsborg has become one of the world’s most advanced biorefineries. From wood, it creates four main products: specialty cellulose, lignosuphonates, vanillin and ethanol, along with 200 GWh a year of bioenergy.

“You have a diversified portfolio of products,” explains Karin Oyaas, research manager at the Paper and Fibre Research Institute in Trondheim. “The Borregaard mill uses all parts of the wood and they have a variety of products, so if one of the products is priced low for a few years, then maybe some of the other products are priced high.”

She feels this is a key change in direction for the industry in Norway. She doesn’t want to see the industry putting all of its eggs in one basket, as it did with newsprint.

Dr. Oyaas also thinks that rebranding the industry is key to its survival and success in Norway. The forestry industry doesn’t get the same kind of attention as the oil industry, nor does it have the high-tech image. But it is just as high-tech, and it has the bonus of being a renewable resource.

“You can make anything from the forest. You can make the same products that you can make from oil,” explains Dr. Oyaas.

Neil Young Confronts Canada’s “Natural Resource Curse” Head On

Canadian Neil Young Stands Up For Canada

Years ago, when Nixon ordered the invasion of Cambodia, on May 1, 1970, four unarmed students demonstrating against the war were essentially murdered by the Ohio National Guard.  David Crosby, Graham Nash, Steven Stills and Canadian Neil Young were driven to record the song “Ohio,” in a rushed recording session. The song went viral before “viral” was even a concept. The Internet did not exist. In less than 24 hours “Ohio” was being played on FM radio stations all across the United States.  That CSNY song, IMHO played a crucial role in Nixon’s demise, and accelerated the end of the Vietnam War. I see Yogi Berra’s “deja vu happening all over again” with Neil Young and the tar sands.

Neil Young has essentially done it again, with his extraordinary stand  this week against the Alberta tar sands, and in support of the First Nations Court action against Shell Oil’s plan to expand the destruction to the boreal forest. He has attracted criticism like Manitoba mosquitos in August. I doubt Neil cares much.

Like in the previous Vietnam War instance, Young is being criticized in the establishment Canadian press. But as with the Vietnam War, I believe the turning point may have been reached with the Alberta tar sands.  Two separate polls in Alberta, one by the Edmonton Journal, and the other by the Huffington Post, have come out overwhelming in support of Neil Young’s opposition to the tar sands. What? How could that be in Alberta? These people depend on tar sands jobs?  An amazing 63% of Albertans polled by both journals approved Neil Young’s actions this week. This may explain the virulent attacks on him in the press, a la the Vietnam War. Corporations and Harper hate losing.

Read more: Alberta Bitumen Bubble and the Canadian Economy

Neil Young is normally a very low key person. I have been fortunate to have met him once, and to have lived in a community he frequented on the coast just south of San Francisco. He has lived there for nearly 40 years with his family.  Since the recording of “Ohio” I cannot recall a time when he has stood up publicly on an issue, and risked his reputation.  Despite all the attacks on him this week, I think Young has gotten it dead right, and time will prove him right.

Alberta Bitumen Bubble And The Canadian Economy: Industry Analysis Case Study

Alberta Tar Sands In Their Indigenous State 

The Canadian media (CBC, Globe & Mail, Canadian Business) have been buzzing with analyses of Alberta Premier Alison Redford’s  pronouncement last month that the “Bitumen Bubble,” is now crashing down on the Alberta economy, and potentially the entire Canadian economy. The Alberta budget released last Thursday, March 7, acknowledged a multi-Billion dollar deficit from this year, and “even larger declines in the next several years,” due to forecasts for significant price decreases for “Western Canada Select“ (WCS), the market term for the Alberta oil sands. This is contrasted with “West Texas Intermediate“ (WTI) which is also known as the standard for “light sweet crude,” which is much cheaper to refine.   Canadian Finance Minister Jim Flaherty echoed the impact of reduced oil sands revenue on the federal budget, by warning of significant cutbacks in federal spending as well.  The impact of this sudden change in the prospects for the Canadian petroleum industry and for government oil tax revenues, will likely also have serious implications for the BC economy, jobs growth, business investment, consumer spending: essentially the Canadian economy as a whole will suffer.

As an Industry Analysis case study for Management students, how did this happen, why was it not foreseen?  Why weren’t foresighted  policies put in place, and what are Alberta and Canada‘s strategic options now?

The June 25th, 2006, CBS News 60 Minutes report by senior CBS News Correspondent Bob Simon, can be taken as a convenient departure point for this analysis.

Video (1min 52 sec.) CBS 60 Minutes: 6/25/2006: The Oil Sands

The so-called “proven reserves” of oil in the Alberta oil sands are estimated to be 175 Billion barrels, second only to Saudi Arabia’s estimated 260 Billion barrel reserve. In the CBS video, Shell Canada CEO, Clive Mather estimates that the total may be as large as 2 Trillion barrels, or eight times that of Saudi Arabia. The CBS 60 Minutes report at the time in 2006, was considered so positive, that it was eventually shown in an endless loop in the foyer of Canada’s Embassy in Washington D.C., at Canada House in London, and elsewhere around the World.   The Alberta oil sands were seen as the harbinger of a great new era of Canadian economic progress and wealth.

Since that time a variety of external market factors, and long-standing failures of Canadian government policy have converged like Shakespeare’s stars, to turn this Pollyanna scenario into the national disaster it has become for Canadians.

Perhaps the single most important point in this discussion is that Canada has historically been a natural resource based economy, which has led to complacency and neglect of investment in innovation.  Innovation is the most important determinant of business competitiveness and economic prosperity in a world of global markets and rapid technological change.  Canada’s overall investment in R&D in science and technology has been below the OECD average for decades, and continues to decline year to year.  As a consequence, Canada has also fallen sharply behind the United States in productivity.  Essentially, there has been a “robbing Peter to pay Paul” mentality in Canada with regard to investment in the future of the Canadian economy. So long as we can simply dig a hole and ship the rocks or oil overseas we are doing just fine, thank you very much!

In a serendipitous coincidence, the current events in Venezuela have provided a parallel to the petroleum industry issues in Canada. Yesterday, the HBR Blog Network published a post by Sarah Green. Ms. Green interviewed Francisco Monaldi, Visiting Professor of Latin American Studies at the Harvard Kennedy School. Professor Monaldi is a leading authority on the politics and economics of the oil industry in Latin America.

During the HBR Blog interview, Professor Monaldi referred to the “resource curse” of Venezuela, also citing Canada and Saudi Arabia as suffering from the same malaise. Venezuela has done all the wrong things under Chavez, and consequently the Venezuelan economy is in shambles. Monaldi cited Chile, who also had a natural resource boom, but are creating a national stabilization fund by not putting all of the money back in the economy at once, a counter cyclical policy almost unheard of in Latin America. A similar scenario of reinvestment in innovation has occurred in New Zealand, whose government has sought to reduce its vulnerability to over-reliance on natural resource exploitation.

A Canadian Broadcasting Corporation interview March 7th on The Current with oil industry expert Robert Johnston, and CBC business columnist Deborah Yedlin, revealed that the Venezuelan Orinoco crude is actually very similar to Alberta WCS, but it does not require massive destruction of the land. Transportation routes to U.S. refineries designed to deal with extra heavy crude have been up and running for years.  The U.S., despite the political tensions with Venezuela, is currently the single largest customer for Venezuelan extra heavy crude.  In The Current interview yesterday, both Johnston and Yedlin admitted that the Alberta oil industry was ” very uneasy”  about their competitive situation vis-a-vis Venezuela.  Yedlin also underscored Canada’s “resource curse” and the failure to diversify Canada’s investment in innovation and technology.

Listen to the CBC interviews: http://www.cbc.ca/thecurrent/episode/2013/03/07/the-future-of-venezuelas-oil-industry-and-what-it-means-for-albertas-oil-patch/

Alberta oil sands, by contrast, are completely land locked, and the Alberta producers are in the midst of an unsavory political wrangle over two pipelines, which has brought undesired attention to the other problems with Canadian bitumen.  Without at least one pipeline, the Alberta oil sands industry is in a questionable state. Should the United States elect not to approve the Keystone XL pipeline to the Gulf of Mexico, Canada’s only viable remaining option would be to sell the oil to China.  Some Canadians are taking the position that Canada “should” sell the oil to China.  The Harper government is now hypersensitive to China’s interest in the oil sands. Others have suggested that we should refine the oil ourselves, but it is cheaper to send it to Texas than to build refineries in Canada. According to Yedlin, Canada is now locked into the urgent need for the pipelines, with no other options or strategy.

The argument can be made that Canada should have been implementing policies like those in Chile or New Zealand years ago, anticipating the boom and bust of the global petroleum market, and socking away money to deal with it.

The most recent 2012 OECD Economic Survey of Canada also serves to underscore the urgent need to change our national policies with regard to natural resource exploitation and investment in innovation to improve our performance in global productivity.

As the oil boom and high value of the loonie have pushed wealth westward, Canada’s productivity growth has been relatively flat in recent decades, and has actually dropped since 2002. Meanwhile, as the OECD observes, productivity growth south of the border has risen by about 30 per cent in the last 20 years — a gap that is causing Canada to lose competitive ground.

“Canada is blessed with abundant natural resources. But it needs to do more to develop other sectors of the economy if it is to maintain a high level of employment and an equitable distribution of the fruits of growth,” study author Peter Jarrett, head of the Canada division at the OECD Economics Department, said in a press release.

Meanwhile, yesterday, Friday, March 8th, the Globe & Mail published a scathing criticism of federal Natural Resources Minister Joe Oliver for characterizing the Alberta oil sands industry as the “environmentally responsible choice for the U.S. to meet its energy needs in oil for years to come.”  G&M Journalist Tzeporah Berman wrote, “At a time when climate change scientists are urgently telling us to significantly scale back the burning of fossil fuels, having a minister promote exactly the opposite really does feel like being told that two plus two equals five.”

Our most respected national journal simply reached the end of its patience with Canadian government “doublespeak.”  Every independent study, including one from the U.S. Department of Energy, has found that the oil sands are one of the World’s dirtiest forms of oil, producing three times more emissions per barrel produced and 22 per cent more greenhouse gas emissions than conventional oil (when their full life cycle of emissions, including burning them in a vehicle are included).  The problem is simple: the massive “energy in versus energy out” equation simply does not work for oil sands.  Large amounts of natural gas and water are required simply to prepare the bitumen for transport to refineries. Yet our government continues to wave its arms in a desperate attempt to divert attention from the facts, rather than to deal with the facts. One would think that our national government by now would have a reality-based strategy to deal with major economic and political issues of this scale.

This discussion has barely touched on the opposition to the two pipelines, Keystone XL and Enbridge Gateway, attempting to move the landlocked tar sands out of Alberta. This is a strategic market issue that should have been addressed years ago, but was not.  The thorny issues of both pipelines are now a rod for Alberta’s own back. Considering the market competitor Venezuela, with comparably unattractive “extra heavy crude,” but having existing transport, the prospects for Alberta are not favorable, and it has finally sunk in for Alberta oil executives.

The long awaited U.S. State Department Draft Environmental Impact Assessment (DEIA) on the Keystone XL pipeline, released early this month, was written by oil industry consultants which have raised significant concerns of a serious conflict of interest in their findings. The Executive Summary of the State Department DEIA took a decidedly neutral position, saying that the pipeline would have “no effect” on the development of the Alberta oil sands. But buried in the report were findings that argue against the need for the pipeline.  The recent developments in Venezuela and the increasing energy independence of the United States were not factored into their findings.

The DEIA specifically evaluated what would happen if President Obama said “no” and denied Keystone XL a permit. It concluded that not building the pipeline would have almost no impact on jobs; on US oil supply; on heavy oil supply for Gulf Coast refineries; or even on the amount of oil sands extracted in Alberta. If these findings are accurate, then one must ask why it is necessary to build the Keystone XL pipeline.

So in conclusion, how could the Canadian federal government not have foreseen this calamity, and prevented it?  Could it have been the giddy euphoria of the 2006 CBS 60 Minutes report?   The only best solution, investing government oil revenue into innovation and technology R&D, may no longer be a viable option.

In such a situation, what would you do to address this crisis for the Canadian economy?