If there’s one conference that’s been generating a lot of talk lately, it was the “stranded assets” conference held a couple weeks ago in Toronto for investors, sponsored by Suncor and Royal Bank. I wasn’t able to make it, but more and more I’m wishing I had. The “stranded assets” concept has to do with the fact that, right now, proven fossil fuel reserves are about four times larger than what we can safely burn (i.e. without causing dangerous climate change). So roughly 3/4 of the world’s current, proven oil reserve are “unburnable carbon.” As a result, oil extraction has now become something like a giant game of musical chairs, where everyone wants to get as much out of the ground as they can before the music stops. For investors, the issue is important because the stock valuation of the big oil companies suggests that investors are still valuing these reserves as though they will all be extracted and sold. This is looking more and more like a bad bet — the more likely scenario is that the reserves become “stranded assets”. And, of course, if you’re looking around the world, trying to decide what oil should stay in the ground, the biggest most obvious conclusion is that Canada’s tar sands bitumen should stay in the ground, because processing it into synthetic oil is itself such an energy-intensive process.

Anyhow, I’ve heard it said that the reason there’s such a big rush to get pipelines built, to get tar sands oil to market, is that the industry itself calculates that it has only 20 years or so before the asset becomes stranded. (I guess it’s also worth mentioning that the federal government is, essentially, betting our economy that the price of oil will rise, and that we will be able to get it out of the ground before the music stops. I suspect they will never change their minds on this, simply because they have taken such a hard line on this issue. It is interesting, however, to see signs that the investment community is starting to sour a bit on that bet, and the smart money may be starting to get out.)

Okay, so what’s up with the price of oil? I’m certainly not an expert, and some of it seems to be just animal spirits. The basic analysis, however, holds that Saudi Arabia, along with some other OPEC producers, have increased production in order to make oil more competitive with shale gas, which has been steadily displacing it throughout much of North America. (This explanation makes sense to me, since I recently had the oil furnace in my basement ripped out and replaced with a natural gas system. The impetus for the change was when my bill for refilling the oil tank went over $800 [up from around $500 six or seven years ago]. With natural gas, the cost of heating my house went from around $200 a month to more like $60.) It’s important to recognize that right now it’s practically impossible to export natural gas from North America (because of the relative absence of LNG facilities), and so it sells well below the “world” price. So in principle you don’t have to keep oil low forever, to stop North Americans from defecting to gas, you just need to keep it low until the price of natural gas rises, which is what it will do as LNG facilities are built.

In any case, there is also some interesting speculation that the Saudi objective is to put Canada out of business. Since the cost of production of a barrel of oil in Saudi Arabia is around $5, while it is over $50 per barrel in Canada, it’s not difficult for them to put the squeeze on us. At very least, it starts to make new infrastructure investments in the tar sands look more and more dubious. I think it also provides a glimpse of what the fossil fuel endgame will look like, even though it would be overly optimistic to think that we are in such an endgame now. Basically, it will be a mad rush to get the last bit of “burnable” out of carbon out of the ground, as quickly as possible. And in such an endgame, I don’t see how Canada could possibly win. It just seems to me that we are inevitably going to be squeezed out by the low-cost producers.

All that having been said, the current federal government’s relentless efforts to subordinate all other interests in the country to those of the Alberta tar sands is starting to look more and more foolish.

Finally, I know it’s a total waste of time to say this, but with oil prices falling so dramatically, now would be a really good time to impose a carbon tax — you could do it now and consumers wouldn’t even notice. Gas prices would still go down, they just wouldn’t go down by as much as they otherwise would have.