The problem that the author poses is a familiar one to all economists - the low-hanging fruit problem. If we want fruit from a tree, we pick the lowest ones by hand. If we want more, we get a ladder. If we want even more, we might rent a tree-shaking machine. As the fruit becomes more inaccesible, we have to pay more for the last apple. So it is with tar sands and Saudi oil. Are we willing to pay more for security of supply?

Herbert Inhaber

Many of our statesmen in Congress are fighting any increase in the CAFE standards, which are not very effective anyway given the SUV exemption. It would cost jobs, they say. The end of cheap oil is near, and it is going to cost a lot more than jobs. If we had a rational energy policy, the auto factories would be converted to produce wind and ocean current turbines. Thanks for a good article.

We should, however, factor in technology. Coal (or even petroleum coke) gasification technology will make it possible to make hydrogen on site in Alberta at a cheap price, refining sand oil into gasoline on the spot with no need for natural gas or naphtha whatsoever (see www.zeca.org). While this kind of science and technology may seem pie in the sky now, it is indeed possible, and it likely will happen with some variation or other. It may not be that far off.

When this gasification technology is routine, oil from sands in Alberta will be seen in a totally different light. Not only that, but the identical technology will make methane (natural gas), hydrogen, and oil products from coal possible also, and with even higher efficiency. Calgary should be much larger in a 20 years or so, and should stay that way for a hundred years or more, or until the oil sands stop yielding oil. I suppose Illinois and other large coal states in the U.S. should enjoy a similar bonanza as well.

Thus, oil sands and Saudi oil and Qatar gas do have to compete with world coal prices. OPEC will not let it’s price drift too far over that coal ceiling. The other side of the coin is that global consumers of oil will use it all, no matter where it comes from. In the and, oil will come from all these sources, and more. The price will be rise according to source, but that’s the way it goes. Children born today should see this all unfold. After all, oil sands are happening now, and its investors can prosper even more if they make the needed technologies happen, and one has to believe they will. Eventually, the Saudis will be buying oil from the U.S. and Canada because between us we have well over a trillion barrels in these hard to get sands and shale. Actually, we have over 2 trillion barrels between us, according to geologists.

Synthetic crude oil from oil sands production is expensive and the author adequately mentions a production and refining cost in the range of $9 per barrel. At current prices that still leaves a significant profit margin for the oil industry to enjoy. Sure, compared to Saudi oil at $2.00 per barrel, North America is at a tremendous disadvantage earnings wise, but our industry can still make money even if the price of crude falls to $10.

One of the advantages of oil sands production that was not mentioned is the fact that we know where the bitumen is and how much is there and we also know how to extract the oil from it. You ask any oil sands company operating in the Fort McMurray area and they will tell you that once they start to mine the oil sands, it is a 30 to 50 year process of continous extraction at a set production level per day, with the larger mines producing upwards of 200,000 barrels per day for 30 years or more. Once they discover where to start digging, they just set up a mine and start producing. There is no further need for expensive exploration budgets like conventional crude oil companies might have in order to continue finding new reserves to replace their older dwindling reserves.

The cost of natural gas is high right now because the demand for it is high and the supply is low. This is partly due to the lack of production and partly due to inadequate distribution capacity. North America's appetite for cleaner burning power plants can also be partly to blame for that, but so can our climate. Regardless, unless we stop driving our cars or suddenly convert them over to hydogen, our demand for crude oil and the petroleum products it prodcuces will only continue to grow. Now is not the time to start talking about throwing in the towel. To use the author's own analogy, the apples are no doubt becoming harder to get at but we still need to put in an effort to get at them. Better yet, we need to invest in home grown technologies to manage the harvest the best way we can so we can enjoy our security and way of life just a little bit longer.

The oil sands industry in Canada is facing a lot of uncertainty right now because of the Kyoto Protocol. When Canada ratified the accord, the province of Alberta raised this as a big objection. Oil sands processing is extremely "carbon intensive" in that a lot of CO2 is emitted by all the fossil fuel consumption required to extract the resource (both as diesel for all the mining vehicles and from the natural gas consumed in processing.) This is in addition to the CO2 emitted by the consumption of the final product. For these reasons, oil sands fuels are very unfavourable from a climate change point of view.

Now, the Kyoto Accord has not entered into force yet, and will only take effect if Russia ratifies (which Putin is pushing for, against internal resistance.) However, Canada is going ahead with efforts to achieve CO2 reductions, CO2 credits trading may be getting started on its own, and the oil sands industry is already showing effects of the potential liability if CO2 emissions limits such as a cap-and-trade system comes about. News is mixed, as some reports recount proposed oil sands developments on hold or facing cancellation due to CO2 concerns, while other projects appear to be shrugging off Kyoto or accepting Canadian federal government assurances that CO2 credits will be capped at a modest price to protect resource industries from a price shock.

Prof. Danny Harvey here at University of Toronto has researched the climate impact of fossil fuel consumption. In short, burning all the oil and gas and coal we could reasonably hope to pull out of the ground would more than double the CO2 in the atmosphere; extracting and burning all the oil sands resource would be about an order of magnitude worse, if I recall. Without digging up his specific estimate, suffice it to say the climate would be drastically harmed if we were to consume even a fraction of the oil sands resource without CO2 capture and storage.

I appreciated the mention of the ZECA project. That kind of thinking is crucial to getting out of the climate change bind. In fact if ZECA succeeds, this is a better prospect for the climate than oil sands. Coal reserves are extensive and might provide a workable "cushion" for the transition to a zero-emission energy economy.

But while we search for answers on the resource side, urgent action is needed to cut consumption now, on all fronts: electricity, oil, gas, coal. The energy we *waste* is scandalous, from poor insulation to SUVs to incandescent bulbs to lights left on with nobody around. Efficiency by far is the most cost effective energy "source" on the menu today - often having zero or negative net cost.

It's a shame the Bush administration is treating climate change as still in doubt, and putting off the tough decisions needed to lower the U.S.'s greenhouse gas emissions. Several states are moving ahead on their own, fortunately.

I was researching oil sands companies as a potential long-term retirement investment. I too was somewhat surprised to learn that oil sands production did not use large amounts of energy derived from direct production in the extraction process. But after thinking about this, the producers, driven by maximizing stockholder value and system efficiency, have found that their synthetic oil has a higher value in forward sale than Canadian natural gas/naptha feedstocks. On an equivalent energy/technical basis, if local feedstocks were as expensive as synoil, it would be doubtful that shareholders would have allowed synoil production to climb to 1/3 of Canada’s crude output (if that is the correct number).

Also Mr. Luft’s comment…”Keep in mind: both naphtha and natural gas are closely tied to the price of conventional oil. When the price of oil goes up, the price of these products rises accordingly, making production of crude from oil sands even more expensive. This process undermines the logic propagated by oil sands supporters according to which oil sands will become more economical when the price of conventional oil goes up. Clearly, if the price of energy increases, the price of producing Alberta's oil will increase on the same scale”.

I agree that his statement is accurate, but it doesn’t consider the other half of the income statement. From the perspective of oil sands producers’ viability, if energy prices rise, the producers’ revenues generally will rise along with the cost of heating feedstock. If the increase is on the same scale as Mr. Luft suggests, then profitability would not be impacted and thus the viability of the producers would seem unchanged (possibly they could become even more economical through other specific business/technical factors that we don't see at this high level of analysis).

The feedstock energy cost seems less of a threat to viability than long term Kyoto impacts, other less expensive sources of competitive energy…or…should I live so long…Middle East oil becoming cheap again.

Clearly Middle East oil is not going to be replaced by Canada’s under today’s economics. However, there are those in the Middle East that believe their oil is being sold at a small fraction of its real value. They are not in control…but that could change over time.

The long view of the Middle East morass compared to the long view of the impact of technology on synoil production, leaves me open minded about Canadian Oil Sands.

Regards, Bruce Cavender

I have also heard that the energy requirements for extracting the oil is very large. It has to be heated to high temperature in order to flow, and to be able to be pumped out of the ground. One may also want (or need) to add hydrogen to the crude in order to decrease viscosity and to make it more desireable as a vehicle fuel (although this may be done at a refinery somewhere, as opposed to on site). I heard that a major field would require the equivalent of one or more large power plants dedicated specifically to the operation (to supply steam and/or heat).

As Mr. Prall pointed out, this will involve significant on-site CO2 emissions, in addition to that from the oil itself. Gas is the initial proposal for the power (heat) source. Thus, adhering to Kyoto limits may be problematic for Canada.

I've attended conferences where I've heard serious proposals to use a next-generation CANDU reactor to provide the steam for the oil-sands site. At current gas prices, this approach is economically compeative now, even before any CO2 taxes or credits (based upon AECL's stated reactor cost). This would remove all CO2 emissions from the extraction process, and would allow Canada to make use of its oil reserves while meeting its Kyoto obligations. No other forms of air pollution either.

In addition, using hydrogen generated using a high-temperature reactor (or perhaps even high-temperature steam from a more conventional reactor) you could possibly add hydrogen to the oil itself, thus increasing its H/C ratio. This would reduce the CO2 emissions when it is burned as a fuel.

Projects like these, i.e., large scale, centralized, energy-intensive projects where large amounts of CO2-emission free energy are desired, may represent the ideal application for new nuclear capacity in the near-to-mid future. Once again, with any type of CO2 emissions disincentive (or tax), this proposed alternative approach will actually win on raw economic grounds. Lets hope so. We don't need Canada burning all their gas up there north of the border. The way things are going down here, we need them to save all the gas they can for us.

1. I don't buy the argument that production cost has to drop below $9 to make oil from tar sands "competitive." The fact that Arab oil has lower lifitng costs is not relevant -- as long as the cost is below the market price. We will buy Canadian oil not just because it is more secure but because it is slightly cheaper than Arab oil. Canadian producers discount the price to us to save the higher transport cost to other potential buyers.

2. Canadian cost MAY go down if the CANDU "Slowpoke" nuclear reactor is successful. For details see TWTW of May 3, 2003 on the SEPP web at http://www.sepp.org/weekwas/2003/May3.htm

3. The fly in the ointment is Canada's ratification of the Kyoto Protocol, which is discouraging the necessary investments. This may change when a new govt takes over in 2004.

On a net energy basis, oil sands remains an iffy proposition. Using nuclear to "subsidize" its hydrocarbon energy might make sense but natural gas will have a higher and better use in heating homes.

Well, maybe they'll put it next door in Sasketchawan. Nuclear assist on the oil sand really helps the economics of the situation.