June 19, 2024

Deloitte has released a new "report" on the oil and gas sector's economy in the face of carbon emission pricing.

There are a few take-home messages here to agree with, but much of the analysis is incorrect.

The parts that are correct:

• Money, in the end, determines the validity of technology.
• Oil and gas knows (and has known for a long time) that CCUS (Carbon Capture, Utilization and Storage) does not work.
• You cannot reduce national emissions while increasing national production of oil and gas.
• Companies will likely not invest in a money-losing venture to offset emissions; they would rather simply not spend the money and keep those delicious profits. Maybe invest them in something that will make them more money.
• Not spending money to fund declining profit rates means not spending money on CCUS to offset emissions.
• Not spending money to fund CCUS means reducing the growth rate of increased production.
• Reduced expansion of oil and gas in Canada will reduce the expected growth rate of the economy and jobs that currently fits in our economic models.

All that being said, one should still not put much stock in the report's conclusions. The report can be taken as both good for the planet—if you are a purist environmentalist—because it means reduced emissions, or bad for the economy and jobs—if you think oil and gas are the only way to drive Canada's economy.

To be clear, the report is not saying there is a decline in economic activity because of carbon cap-and-trade systems. It is saying there is a decline in the rate of increase in jobs and economic activity.

Deloitte is not a research organization, it is a (bad) accounting firm. They seek out the cheapest option and then sell it to you, because the cheapest option is always the best for Deloitte.

The broader and more complete research in this field comes to different conclusions. Policy, after all, does not exist as an endgame in a static world. We can actually affect investment decisions.

Remember that the biggest threat to Canadian oil is that it is more carbon-emitting and more expensive than other oil. It has a higher likelihood of becoming a stranded capital asset because of international demand, policy, and economic programs. This is because oil is a globally traded commodity, not simply a "Canadian" asset. Climate policies will be implemented eventually, either by government initiative or due to the realities of living in a world that no longer functions. The costs are built in either way.

It is funny that Deloitte manages to (accidentally?) say the quiet part out loud: You cannot reduce emissions while increasing production. Anyone with half a brain knows that, but the Liberals (and the Conservatives before them) live in denial of this basic math.

As usual, there is concerned that the Canadian Press article is not reporting on the full story.

The emission targets in Canada are not really what is driving these policies on private capital investment. If it was, we would be actually reducing emissions through the cap-and-trade program and carbon "taxes", instead of just growing emissions more slowly. (We call growing emissions more slowly "reducing carbon intensity".)

It is the international policy environment that is driving investment in Canadian production. Oil companies know that Canadian oil reaches an end before everywhere else. This is why the focus for Canada has been on the mythical CCUS as savior of the industry.

No serious person really thinks that CCUS investment is a cheap or sustainable program under a for-profit capitalist system. And the economics of fining emitters (that's what a carbon tax/credit system is) while pretending that those same companies will not mind paying increased fees to invest is dubious at best.

It is this contradiction between needed investment and increased fines that is the problem in Canada.

It is the same question as the one facing the battery/EV sectors. The question is: how do you force capital to invest in unprofitable development in the hope of profits later while facing a declining revenue proposition?

Once upon a time, you might have been able to convince some private capital to do such a thing. Nice reports and graphs on expected returns, low interest rates, and increased productivity could create an incentive to invest. That is not really the case anymore, even with good math. But investing in what is bound to become a stranded asset and a money loser is impossible for a publicly traded company. Investment will simply move to another firm.

This is why we have always opposed these quasi/pseudo-market interventions. The real world does not work this way, and such interventions have historically failed to achieve a "transition" any faster than what would have happened without them.

Oil and gas companies pushed for a carbon tax over regulatory caps because they knew it would not work to reduce their profits in the short term, and prove unpopular in the medium term. It was never a good model.

The only answer to this has been the same answer since the first conversations over what to do about climate change. It is through public investment in transition, which will take huge amounts of money. Under the private ownership of oil and gas, that means massive profit subsidies in "hope" that this creates enough leeway that investment becomes profitable. The alternative is to expand an expensive program in CCUS for hard to abate production, renewable generation of hydrogen, ammonia, green carbon, and derivatives for chemical production that is publicly funded and structured as a Crown or other state-owned entity.

None of these are very popular answers, but what is the alternative? Simply to pretend that we can carry on as before? That is not going to work either, as younger generations and sensible people question the sanity of a policy of extinction.

Like with the EV investment. We pay eventually.

Better to pay less of an increase now and try to ensure the correct investments are made, rather than ensuring a disorderly market-driven collapse of the industry caused by the decay of the climate and society.

How we set up the payment structure here is what really matters. And you all know our thoughts on that.