Is Nova Scotia ready for the oil supply crunch?

Last Monday, the International Energy Agency (IEA) released its annual five-year outlook for crude oil, examining demand and supply over the period 2007 to 2012. The IEA is projecting a supply crunch caused by the growing demand for oil in all regions of the world and supply difficulties in a number of oil-producing countries.

Demand for crude oil is being driven primarily by transportation, notably increases in private automotives and the growing aviation market. The greatest rise in demand is expected to occur in Asia, with the Middle East experiencing substantial growth as well, a result of its burgeoning population of young people. It appears that the only way demand could be curtailed would be through an economic slowdown, yet even the IEA’s low-economic growth scenario still implies a significant increase in the demand for oil.

New crude oil production must replace oil that has already been consumed as well as meet new demand. Although the supply of crude oil is anticipated to continue exceeding demand, the amount of spare capacity is expected to decline, meaning that events such as hurricanes, military coups, or other supply disruptions could result in unexpected shortages. The IEA includes biofuels—seen by many as a ready substitute for oil products such as gasoline—in their supply projections, but warn of the consequences of relying on a fuel source that will be in competition for arable land that is also used for food.

The IEA’s projection of a supply crunch should be of concern to anyone living in a jurisdiction that relies on imported crude oil and oil products for activities such as transportation, space heating, and electrical generation—like Nova Scotia.

Nova Scotia is in the unenviable situation of relying almost exclusively on oil imported from regions that will contribute to the supply crunch: the UK sector of the North Sea (production peaked in 1999 and is now in decline), the Middle East (politically volatile and has a growing internal demand for its own oil products), Venezuela (looking for other markets as part of its war-of-words with the US), and offshore Newfoundland (production is expected to peak within the next few years and then decline).

It is important to remember that although Newfoundland’s oil is “Canadian”, it is still subject to world oil prices. This has two implications for Nova Scotians, the first being that oil from Newfoundland will not be any less expensive than oil imported from anywhere else in the world. And second, crude oil will be sold to the highest bidder, meaning that there is no guarantee that Nova Scotians will have access to crude oil or oil products.

Anyone who drives a car or heats their home with oil is well aware that the price of gasoline and fuel oil has increased dramatically. According to Statistics Canada, the five years between 2002 and 2006 saw the price of these fuels rise by 29 and 40 percent, respectively—the greatest five-year increase over the past decade.

Reactions to these price increases by the province’s politicians have been, sadly, predictable. Last November, the provincial Conservative government took the NDP’s proposal for rebating the tax on home heating fuels to anyone purchasing these fuels. Rather than targeting those in need, the program included all Nova Scotians, regardless of income, and is expected to cost the province between $60 and $70 million. Not to be outdone, the provincial Liberals recently announced their plan to reduce the motive fuel tax by at least four cents per litre at a cost to the province of about $50 million.

If the IEA is correct about a supply crunch and prices continue to climb, Nova Scotians will be facing higher costs for anything associated with crude oil, from gasoline to home heating fuel to food products. The question now becomes, how will Nova Scotians—and their politicians—respond?

Further tax-rebates and subsidies, other than to those in need, will be of no benefit to the provincial economy. It is necessary to realize that, for example, dipping into the province’s meager offshore royalties to offset higher energy costs offers nothing more than short-term relief with little prospect of long-term energy security.

Research carried out by the Dalhousie University Energy Research Group has shown that reducing demand for imported energy and replacing it with domestic sources will probably take several decades and result in significant changes in how we produce and use energy. Such a program will require a review of existing and potential energy sources, and their associated infrastructure. However, there are policies that could be enacted now to reduce the province’s oil demand; for example, lowering the highway speed limit and requiring all new houses to be built to maximize their use of solar energy.

Nova Scotia will be particularly vulnerable to the IEA’s projected supply crunch: first, because of the province’s lack of energy security, and second, because of the province’s lack of political leadership.

Submitted to Chronicle-Herald - 11 July 2007 - unpublished