Sunday, May 17, 2015


Massing images of the tar sands’ environmental impact now go for a mouse click of a month’s internet bill a barrel. Moonscapes and toxic pools of extraction are attended by slick flocks of infographics dawn-chattering about species displacement, water shortages, and carbon overload. The spillover of Canadian oil is renewably inking newsprint and spiking protests from Burnaby to Quebec City. While surprisingly not unanimous, the ecological case against a continued reliance on oil seems well-sedimented. What seems underpublicized to this carbon-based life is the good evidence that Canada’s rampant pursuit and championing of oil is also economically unsustainable. Economist Jeff Rubin’s new book The Carbon Bubble: What Happens to Us When It Bursts (Penguin Random House of Canada) drills home just how much cultivating an oil-based economy ignores a growing global trend away from non-renewables. By countering the ideological marketing campaign of Harper’s fossil-friendly Conservatives with proof of dismal returns (compared to other fossil fuel powers) and in highlighting the missed economic opportunities (manufacturing renewal, hydro-electric development, and agricultural renaissance) of our current changing climate, Rubin pokes bank-sized holes in the inflated claims of Canada’s energy supremacy. I ran some of my speculations by him.

Brad de Roo – who thinks you should invest in a ticket to Jeff Rubin’s visit to Guelph, May 27th at 7:00pm, Lakeside Hope House

In your writing, do you have to take unique precautions or adopt special strategies to get the economics across?

I try in my writing to relate economic concepts to the reader in a way that does not presuppose any prior acquaintance or formal knowledge of the field. I try to create pictures that are readily recognizable in terms of everyday life experiences that, at the same time, convey key economic principles that are germane to what I’m discussing in my books. Hopefully my writing crosses over technical barriers and allows the material to be accessible to a much wider audience than simply other economists or, for that matter, a business audience. At the end of the day economics, for all its jargon and its technical nature, is something that matters to everyone.

What are the biggest myths about oil in Canada? Why do they persist?

The biggest myth about Canada’s oil sands is that they are a viable commercial source of energy. How much oil is buried in the oil sands is not the issue. The issue is what price is needed to cover the cost of extracting it and provide a reasonable rate of return to whoever is doing the extracting. And therein lies the problem. The bitumen (heavy oil) contained in the Alberta oil sands is one of the most costly sources of oil in the world. New projects typically top the global charts insofar as development and production costs are concerned.

At high enough oil prices the oil sands make economic sense, but those same prices that make the extraction and refinement of bitumen viable turn out to be the same kind of prices that kill economic growth, hence fuel demand. We now have a decade of experience with triple digit oil prices. During that time frame the global economy has witnessed the deepest recession in the post-war period followed by one of the most anemic recoveries. Economic growth and triple digit oil prices don’t mix very well. The paradox for oil sand producers, as well as for other high cost sources of high non-conventional supply like fracked shale formations, is the same prices that makes production viable kills the demand for their product. That is the hub of problem with the high oil prices that the oil sands are so critically dependent on.

Why does the mythology of the oil sands being a great economic resource persist in Canada?

When was the last time you watched a hockey game, or read a newspaper or were browsing on the internet that you didn’t see an advertisement telling you that TransCanada’s Energy East pipeline was good for the economy and good for the environment? In my twenty years as a chief economist on Bay Street I can’t recall an industry advertising campaign that has been so dominant, so pervasive, and so unchallenged in the Canadian business media.

And of course let’s not forget the leading contribution that Prime Minister Harper has made to propagating that mythology. Ever since coming to power in 2006 he has championed the resource and has argued that its development, along with new pipeline approvals, was as important to the future of the Canadian economy as the building of a transcontinental railway was over a century ago. Unlike much of the cheerleading heard in the business media, which is motivated mostly by the need for advertising dollars, I believe that Prime Minster Harper is genuine in his enthusiasm for the resource. I just happen to think he is sadly mistaken about its economic value.

What is a bubble in economic terms? How does the carbon bubble compare to bubbles of Canada’s past? Are there lesson teaching, confidence inspiring instances of burst-avoiding recoveries in our economic history?

A bubble is a speculative phenomenon based on false underlying assumptions. The most recent example was the sub-prime mortgage market where credit rating agencies assigned the same credit rating to securities backed by mortgage payments of unemployed homeowners as they did to the sovereign debt of countries like Canada and the United States. And banks and other financial institutions all over the world ended up writing off billions of dollars on defaulted debt as insolvent homeowners mailed in their keys instead of their mortgage cheques.

Financial bubbles are of course nothing new. History is replete with them. The Dutch tulip bulb bubble of the 16th century, or the South Sea Trading Company bubble of the 17th century are two of the more famous ones. But the carbon bubble is going to hit particularly hard in Canada given how leveraged the Canadian economy has been to the massive expansion of the oil sands.

Why are Conservatives often painted as sound economic managers, when the facts of the last decade (deficits, missed economic opportunities, diminished industrial diversity) often counteract this impression?

I suspect because Canada went relatively unscathed in the last financial bubble and avoided some of the worst consequences of that bubble like failed banks and insurance companies requiring massive public bail-outs. Canada’s economic growth, while modest by historical standards, was superior to Europe’s and Japan and was as good or better than the US.

Harper’s attachment to Canada’s future as an Energy Super Power is disarmingly monological in presentation and focus. Why hasn’t he taken advantage of Canada’s vast resources in other power sectors (hydro-electric, natural gas etc) while also developing oil? Is there something about his economic philosophy that predicates this tunnel vision?

Well, I think you have to understand the temper of the times which molded Harper’s vision of the country as a oil power. At the turn of the millennium, Canadians had seldom felt more backward or provincial in the shadow of the IT revolution – seemingly the same hewers of wood and drawers of water that their forefathers had been. When the dot-com bubble burst, all of a sudden the engine of economic growth shifted from Silicon Valley to the rapidly industrializing economies of the so-called BRICs (Brazil, Russia, India and China). These economies needed resources, not software programs. And the resource they needed the most to sustain their booming economies was oil.

Thanks to their thirst for the fuel, world oil demand soared just as conventional oil production peaked, which incidentally it did in 2005 – a year before Harper first articulated his grand vision of Canada becoming a petro-power. The world was to become even more dependent on high cost unconventional oil, whether it came from deep water fields, oil sands, or later shale formations. And during most of the last decade we saw triple digit oil prices, that seemed to confirm Harper’s dream of Canada becoming the Saudi Arabia of high cost oil.

You suggest that increased growing seasons, robust water supplies, and a rise in global food prices will put Canada in an advantageous position to become a bread-basket for the world. The chapter devoted to this topic is a book waiting to be written, especially considering serious water shortages in agriculture-rich California (a major Ag. supplier to North America). What challenges are there in growing this area of the Canadian economy? Would you consider writing the book?

By far the biggest challenge of becoming the world’s breadbasket will be water. That may seem odd considering that the country holds between 7- 20 per cent of the world’s freshwater supply, depending on whether you want to include fossil water into the measurement or not. But most of Canada’s water flows the wrong way insofar as agriculture is concerned, draining into either Hudson Bay or the Arctic Ocean, whereas the bulk of Canada’s food production comes from the prairies. With the decreasing snow pack in the eastern Rockies and hence declining spring run-off we are going to see heightened demand for major inter-basin water diversions, or waterworks as I call them, in the not too distant future. While they are not likely to be as dramatic as past schemes that I discuss in my book, like the North American Water and Power Alliance (NAWAPA) or the GRAND Canal scheme, they will invariably involve significant inter-basin water transfers. And any time you do that, you pit downstream interests against upstream interests. Only in this particular case downstream versus upstream interests are going to involve different provinces.

I feel like I merely scratched the surface of this subject in The Carbon Bubble. Climate change will provide all kinds of economic opportunities as well as challenges and adjustments. The subject is certainly is worthy of another book but I’m sure my publisher Random House would like to sell a few copies of The Carbon Bubble before they ask me to write another one.

A 2014 study by the Conference Board of Canada notes that age is the new income divide in Canada. The average disposable income of Canadians between the ages of 50 and 54 is now 64 per cent higher than that of 25-29-year olds, the report found. How does this disparity factor into your observations in The Carbon Bubble?

I think the Conference Board’s observation is part of a larger trend toward an increasingly skewed distribution of income, with a small proportion of the population accounting for the lion’s share of the economic pie at the expense of the lower and middle classes. Globalization is certainly part of the story here. It denudes local labour markets and government of their ability to bargain with footloose capital that seeks the lowest wages and the lowest taxes. Much slower economic growth is another factor. You simply don’t have the same income generation and job creation as you did in the past. As I argued in my last book, The End of Growth, we are going to have to see some major changes in the way labour markets operate, like job sharing, if we are to provide the employment opportunities to future generations that we once took for granted.

Besides buying your book, what is the smartest thing an investor can do in 2015?

Divest from oil stocks. Major coal stocks in the US like Peabody Energy or Arch Coal have already lost about 90 per cent of their share values over the last three years and I suspect something similar is going to happen to oil stocks, particularly oil sands producers, who carry some of the highest production costs in the world. So before you save the world from further carbon emissions, you might want to save your portfolio from further loses from carbon stocks. 

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