High oil prices: subsidies are not the answer

A few weeks ago, Saudi Arabia’s King Abdullah announced that new oil finds in his country should be left in the ground for the benefit of future generations of Saudis. Other governments in some of the world’s few remaining major oil exporting countries, including Russia, Angola, Azerbaijan, and Norway, have also decided to restrict the exploitation of their national oil fields. With world crude oil production stalled at around 76 million barrels a day (the remaining 12 million comes from natural gas liquids, volumetric refinery gains, and biofuels) and growing world demand, any limits placed on production will result in a further tightening of oil supplies.

As demand pushes production to its limits, the price of oil can be expected to climb ever higher. For those who cannot afford the higher prices, it will mean shortages.

Not surprisingly, Nova Scotians are feeling the effect of rising oil prices, either directly or indirectly, in the purchase of a wide range of goods and services, including home heating fuel, gasoline, diesel, and groceries. Sadly, the responses of Nova Scotia’s political parties have been all too predictable.

In the last provincial election two years ago, the Conservatives took the NDP’s proposal to rebate the eight percent portion of the HST from the sale of all home heating fuels. The rebate did nothing to stop the rise in fuel prices and it was estimated to cost the province $65 million last year. As the price of price of fuel oil increases, the size of the rebate will rise as well, increasing the cost to the province.

Gasoline (and diesel) costs, like that of fuel oil, are moving upwards as the cost of crude oil rises. The Conservative’s attempt at manipulating the market through the regulation of automotive fuel prices clearly does not work in a time of rapidly rising prices. Both the NDP’s proposal to remove the HST from the motive fuel tax (at least $12 million) and the Liberal’s plan to reduce the motive fuel tax (at least $40 million) are modest savings that would soon be lost in the overall cost of the fuel.

Tax rebates and modifying tax structures may be politically attractive, but they are essentially subsidizing the purchase of oil products—draining the province of funds that could be better spent on improving the province’s energy security for the long-term benefit of all Nova Scotians.

This will require legislation that focuses on ensuring that Nova Scotians have access to reliable supplies of affordable energy. It will also require a wholesale change in how energy is used in the province: energy consumption must be reduced and the consumption that is needed must be replaced by secure supplies.

The province’s largest end-use of energy is transportation—almost all of which is fueled by oil. Since the province will never be able to replace its transportation energy demand with biofuels, a major energy reduction campaign is needed (if biofuels must be produced, they should be intended for agriculture and emergency services). Examples of reduction include highway speed restrictions and vehicle maintenance. Ultimately, moving goods and people over significant distances must be done by rail, as rail is an efficient means of transportation and its primary fuel source (oil) can be replaced by electricity. Returning to rail will mean a stop to rail abandonment and the restoration of many railway right-of-ways.

The second largest end-use of energy in the province is space and water heating, primarily in the residential, commercial, and institutional sectors. Reduction in existing buildings can be achieved through retrofitting programs, while new buildings should be required to reduce their energy requirements. There are many approaches to replacing space and water heating with more secure sources, including solar-heating, biomass, wind-heating, and geothermal.

Since Nova Scotia imports about 85 percent of its energy (of which about 60 percent is oil and oil products), improving energy security should be of paramount importance to the province’s politicians. However, rather than energy security, their focus is on energy subsidies, a decision that will cost Nova Scotian’s dearly as world energy prices continue to climb and production fails to meet demand.

Published: Chronicle-Herald—30 April 2008