Yet another carbon bubble paper that misses the mark

One of the interesting features of the climate change debate is that many of the highest profile academics in the field are European and many of the papers have what, to outsiders such as myself, might appear to be unconscious European biases. I previously noted this in a blog post discussing the famous Nature article titled “The geographical distribution of fossil fuels unused when limiting global warming to 2°C” authored by McGlade and Ekins. Well today another paper (in this journal short articles are called “letters”) came out titled: Macroeconomic impact of stranded fossil fuel assets by Mercure et al. Now let’s point out that Dr. Mercure is actually a Canadian, but the paper itself, as I will discuss, really misses out the importance that geography plays in the North American energy markets and in doing so I think it misses the mark. This letter is already being used by opponents of the Trans Mountain Expansion (TMX) project as a justification to not complete the project.  This blog post will examine some of the strange issues I have with this letter that demonstrate why I believe it shouldn’t be considered a useful resource in discussing whether the TMX project is built or not.

Now one of the complaints about my posts is they are too long (TL:DR) so this time I am going to try something new. I am going to go with an Executive Summary approach using bullets that summarize the points I will address in detail in this blog. Here are the main reasons I have serious reservations about this letter:

  • The letter assumes that the US and Canada will simply roll over and abandon their fossil fuel industries without imposing any import controls or trade protection measures.
  • The letter deliberately excludes the logistical challenges associated with getting crude oil into continental North America and “minimises” crude oil transportation costs.
  • The letter ignores the difference between heavy and light oils and assumes that all the oil produced in the world will be OPEC lights, irrespective of the refining capacity and the needs of the chemical industries for heavy oils.
  • The model used to calculate stranded fossil fuel asset (SFFA) impacts comes to some strange conclusions about ho that stranding will affect other seemingly unrelated parts of the Canadian economy including:
    • The models somehow concludes SFFA will result in a substantial decrease Canadian agricultural production.
    • The models somehow concludes SFFA will result in a substantial reduction in the Canadian metals extraction industry even though those metals will be absolutely necessary in the production of the renewable energy technologies (including the co-production of critical elements as a by-product of the fossil fuel extraction) .

Looking at this list it is hard to believe that this letter would be used for any serious policy discussion about whether the TMX project is built or not.. Now let’s look at some details.

To begin I will note that I was a child during the 1979 Energy Crisis which I remember vividly. One of the big outcomes of that crisis was a political decision that the United States would never again allow itself to become dependent on Middle Eastern oil for its economic survival. The US even went so far as to ban the export of crude oil to ensure that its domestic supply was reserved and available for domestic use. It was only with the most recent shale boom that the US government reversed these policies. Yet in this study Mercure et al. assume that the United States and Canada would not impose any import controls or trade protection measures in response to the decrease in demand for fossil fuels. Mercure et al. assume the United States would allow themselves to become utterly dependent on the mullahs in Riyadh and Tehran for the fuels that run their economy and their military. I’m sorry but no political leader in the United States would return the US to dependence on Saudi Arabia and Iran for their economic lifelines.

Another assumption I take issue with is the cost factor. In the letter the authors are incredibly careful to consider the costs of production of fossil fuels but appear to completely ignore the costs to transport those materials. One of the stated reasons for building pipelines in Canada is the decrease in price we currently obtain for our crude because of the costs involved in transporting the crude to markets. Yet in the letter the authors specifically ignore how these costs would affect the decisions to shutter our energy projects. As the authors state in the supplemental material it is instead assumed that the available supplies are matched to demands in an efficient manner with transportation costs minimised. I personally believe this is an example of that unconscious European bias I mentioned above. Europe is so completely interconnected that from there it is easy for forget how hard it is to get fuel to a place like Yellowknife or Price George. Perhaps the authors of the paper forgot that North America is a huge continent with serious geographical challenges. Getting crude oil from Saudi Arabia to the Midwest refineries is not a cost-free measure, but that is how the authors treat it. As for Canada, in order for that Saudi crude to make it to the refineries around Edmonton we would need to re-configure several thousand kilometers of pipelines including the addition of a massive number of pump stations. You can’t just reverse the Trans Mountain pipeline. The pump stations were designed to take advantage of the elevation drops, they aren’t located to push material up the coastal mountains and over the Rockies in an eastward direction. Ultimately, the costs presented by the authors don’t incorporate the billions necessary to get that crude to the interior of North America where all those refineries are found. Once those costs are incorporated North American crude becomes very cost-competitive to the Saudi crude. A factor the authors don’t really consider.

Another thing I really noticed in reading the paper is how completely the authors appear to misunderstand the global crude market. A scan of the paper shows no evidence that they distinguish between heavy and light crude oils. I have already written a post discussing why heavy crude oils are a different product than light crude oils and cannot be readily replaced by light crude oils in existing refineries. Apparently the authors believe that all we need is the light crude oil produced by the low-cost OPEC partners but we now know that there are different markets for heavy and light crude oils. Any analysis that ignores the difference between heavy and light crude, and the amount of existing infrastructure tuned to refine heavy crude, is simply incomplete. As I pointed out in my previous post, a heavy crude refinery produces more gasoline and diesel and less waste using heavy crude than it does using light crude and has significantly higher margins running the heavy crude. This means that they can afford to buy slightly more expensive domestic heavy crude and still turn a profit. Once again this upends the narrative presented by the authors that the heavy oils in Alberta will be the first to disappear from the market.

Now the highlight of the paper has to be that terrifying Figure 3 which shows a massive drop in Canadian GDP associated with the SFFA. This caused me to go to the supplementary information to try and figure out where all that GDP went. This info is summarized in Supplementary Table 8 which shows some unexpected conclusions. I downloaded the spreadsheet associated with the report but it was not much help and since I am only doing a quick post I am not going to go through the effort of trying to get the original spreadsheets from the authors. Even absent the spreadsheets it is pretty clear that the underlying model makes some unexpected assumptions. Look at the loss in Canadian agricultural output associated with SFFA. Apparently the decrease in our oil industry will result in over 8% loss in agricultural production by 2035. In the model description they appear to indicate that the drop in fossil fuel assets will have cascading effects on consumer confidence and that might be the case if our agricultural industry was primarily for internal use. The problem is that a significant percentage of Canada’s agricultural production is for export which should not be affected by a drop in domestic demand. Moreover, let’s remember, that the global climate models suggest that Canadian agricultural production will increase with the initial phases of climate change. Thus under any reasonable future scenario we would expect the increase in both the amount of agricultural land in Canada and in demand for that output from other parts of the world (particularly near the equator where they will be seeing decreases in production) this should result in substantial increases in Canadian agricultural output not the drops suggested by the model used in this letter.

More puzzling is the precipitous drop in our extraction sectors. Canada has a lot of primary extraction. According to the Government of Canada website, Canada produced $96.9 billion of exports in “Mining, Quarrying, and Oil and Gas Extraction” in 2016 (last year available) with oil and gas making up $61.2 billion of that (63% of total) and mining and quarrying the remaining $35.7 (37%). Metals make up the lion’s share of that second number. Returning to the letter we see that authors predicting an 81.9% decrease in extraction sectors. That means the authors see the collapse of the oil and gas sector taking with it almost half of our metals mining as well. As a primary producer of base metals and minerals it is not clear why we would expect such a dramatic drop in demand for these raw materials in a scenario where massive growth of the alternative energy technologies is expected. Perhaps the authors expect these metals will simply materialize when required? Alternatively it might be that the model is overly simplistic and doesn’t effectively acknowledge what will happen to the Canadian economy in the situation presented.

Looking at the issues with this letter it is clear that a future drop in demand will not result in a massive abandonment of fossil fuel extraction infrastructure in North America. North American fossil fuel assets will not be stranded in the manner suggested by the authors because North American is huge and has a complex geography that affects the cost to move primary resources. North America also has legacy refining infrastructure that will not be abandoned simply because the Saudis can pump cheap light crude oil into the Arabian Gulf. That OPEC oil is not always the right choice for the refineries and it will cost a lot of money to get it to the interior of North America. Moreover, do you really expect the United States to rely on Iranian and Saudi oil? Finally, it is clear that something is amiss with the model the authors use to establish what the reduction in crude demand will have on the North American economy. The integrated North American economy is a complex one and the model the authors have used simply doesn’t effectively reflect that economy. Under climate change Canadian agricultural production is predicted to surge, not decrease, and demand for critical metals and elements will increase not collapse. Any letter that suggests the alternative is true needs to be read with a healthy dose of skepticism.

 

Author’s note:

Dr. Mercure has kindly commented on this post below and I have replied. In particular Dr. Mercure noted some imprecise language which, in the light of the day, needed to be cleaned up. The downside of late-night blogging is you don’t always get the wording right the first time around and as such I have substantially edited this post since it was first put online. I have not changed the content but have definitely changed the tone. Dr. Mercure’s work represents a solid step advancement on our knowledge-base but like any limited paper was not able to be a be-all-end-all document. I feel I have raised some legitimate concerns why this letter should not serve as the basis for a major critique of the TMX pipeline project.

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9 Responses to Yet another carbon bubble paper that misses the mark

  1. Rod Hailey says:

    Your posts are never too long…I don’t understand that criticism at all….You are thorough and thoughtful…better than brief with little substance….

    Liked by 1 person

    • Chester Draws says:

      Agree. The TL;DR criticism is an excuse by people to accept what you write. If you write short posts they will complain there is not enough detail!

      Ignore them.

      Like

    • robert cochrane says:

      Agree.
      Re, ” how completely the authors appear to misunderstand the global crude market”, I have added a note re extraction process given the constant recurrence of the bogeyman decrying “scraping the material off the face of the earth” (please note this is from Wikipedia and very dated. The lions share of extraction was and is invitu, and growing).
      ” By 2009, the two extraction methods used were in situ extraction, when the bitumen occurs deeper within the ground, (which will account for 80 percent of oil sands development) and surface or open-pit mining, when the bitumen is closer to the surface. Only 20 percent of bitumen can be extracted using open pit mining methods…”

      Like

  2. T Wolf says:

    Well thought out and explained Blair. It is clear that you spend a considerable amount more time researching and writing these blog posts than the NIMBY protesters do thinking about the lunacy of their position. I only wish we, here in Alberta, could get this and other pipelines built and operating so that we could go about starting to balance the books of both the province and the country. I hate the fact that my grandkids will never live in a debt free jurisdiction unless they move to another country.

    Liked by 1 person

  3. Ruud Hommel says:

    @ Blair

    Your work, research, knowledge and courage is greatly respected by most of your readers, including myself.
    From this last blog-post however, I get the impression that the work is wearing you down, e.g. your own shown biases and even some sarcasm.
    Being a European myself, I’m fully aware that Europe is in at least as big a mess, politically, socially and economically, as Northern America is.
    Although I find no fault with your arguments and I concur with your conclusion concerning the use of the discussed Letter, I do have a few comments:

    Your first sentence already demands a few questions:
    “One of the interesting features of the climate change debate is that many of the highest profile academics in the field are European and many of the papers produced have strange Eurocentric biases.”
    (1) Why are the highest profile academics European? (More public funding, maybe, and why would that be so?)
    And if they are,
    (2) Why is it strange that there are Eurocentric biases? (Even academics are only human and may very well be subject idiots, who concentrate on what they’re good at –obviously not Northern America–).
    (3) Should Eurocentric not be more like UK centric? (Out of ten contributors, only three and a half do not work in the UK).

    With regard to energy dependency, the move from oil to gas, as well as gas to liquids processes and the move to EV’s, Europe presently has a greater exposure to the Russian Federation than to OPEC.
    In Europe (UK?), Northern America as an energy supplier is an insignificant factor.

    No, Northern America will not simply roll over, but why do you deliberately leave the USA East coast refinery capacity out of your argument? It’s pretty cheap to get Arabian oil there.
    It is funny that the Letter assumes that “all the oil produced in the world will be OPEC lights”. They never may have heard of Venezuelan crude or have seen the black crude storage tanks in Saudi Arabia, nor the heating coils in crude tankers and if they had, they possibly would not have recognized the significance.

    I hope that on second thought, you’ll find, with regard to your “mullahs in Riyadh and Tehran” and on a different level, that you’re not completely without bias yourself?
    Just objectively and no offence meant. I’ve been there (Arabia) and found them in general to be unpleasant people and as always, there were exceptions.

    What I haven’t seen as an argument is that quite a few “low-cost OPEC producers” cannot produce cheaply and yet get their national budgets in balance. Even they need high oil prices, or they will face a -much needed- revolt against the current authorities. Let’s not forget that the Saudis caused the slump in oil prices in order to keep their market share and see what that cost them and what they are accepting now to get the price up, which has nothing to do with getting a good price for Aramco :-).

    In your closing statements, you’re starting, quite unnecessary, to hit below the belt, while this could easily have been turned into constructive criticism by helping them to improve their modeling, I find your arguments compelling and so (possibly) could they.
    Admittedly, figure three looks like a product of someone who has an axe to grind with Canada. Of course “Europeans” only know as much of Northern America as “Northern Americans” know of Europe, but surely Dr. Mercure, being from North America himself, could have straightened the team out? Or at least, when reviewing the final results should have been alerted by oddball figure three.

    As always, I’ll be looking forward to your next post. Please don’t kick me of your subscribers list for being just a little bit critical. Most of all,

    Have fun.

    Like

    • robert says:

      “They never may have heard of Venezuelan crude or have seen the black crude storage tanks in Saudi Arabia”.
      Venezuelan oil is a non-factor as the industry (and country) is in shambles, with approx zero exports; this will remain the case for a very long time to come.
      There are no dirtier oils than 1. Venezuelan and, 2. Saudi
      40% of US demand is supplied by Canada; at heavily discounted prices given, ‘reciprocity’ (that’d be a fun item to detail, Blair).

      Like

  4. David Middleton says:

    Interesting post Blair, and I find your writing both clear and coherant and of definately reasonable length, while taking the time to get the details accurate. Perhaps the twitter/snapchat generation would prefer everything in 140 character bytes of data, but I have gone back to some of your older articles and found them eminently a pleasure to read.

    Certainly there would appear to be bias in their report, and any reasonable publication that accepted any public funds towards their research should be forced to publish both methodology and data to backup their findings and conclusions (much like the open pharma calls of Ben Goldacre and his attempts to get pharmaceutical companies to release all of their study results).

    I am continually surprised at the vehement opposition of certain areas of Canada that object so strenuously to Canadian sourced oils, meanwhile accepting tankerloads of oil up the St. Lawrence, paying US$ for the cargo’s, and then dumping raw sewage into the river. it seems to me using our local resources is the best way to help our fellow provinces and generate the personal and business taxes our governments desperately require to fund the medical and social benefits we enjoy.

    Keep up the great work blogging your thoughts and opinions, your website/blog is a great resource, as we really need reason in our conversations over the issues you discuss.

    cheers

    Liked by 1 person

  5. Dear Blair,

    Many thanks for your attention to our study. I would like to clarify some points.

    As you point out, I am Canadian, so I do know my North American geography, thank you very much. I should also point out that this letter in Nature Climate Change went through 9 months of peer review, has been reviewed and tested by many experts, and required work over more that three years, so this is very careful science. Letters in Nature Climate Change normally report the best climate science worldwide. If you want to understand the assumptions of our study better (you make a few incorrect inferences in your blog), please contact us and we can supply you with all of the necessary information (although it is quite a large dataset — not possible to include all of it in a paper or in its supplementary information). None of it is proprietary or hidden, as opposed to what you assert (it is not very helpful to make uninformed assertions about methods in other people’s work — for instance, please see our open access methodological article at https://doi.org/10.1016/j.esr.2018.03.003). Supplementary Table 8 is not a set of assumptions, as the caption clearly indicates, it is a set of outcomes of the modelling exercise.

    Ultimately, this debate is about the demand for fossil fuels, not really about their supply chains, and therefore much of the arguments that you put forwards are not actually relevant to our study. The main point of our study is that we have estimated the demand for fossil fuels using technology diffusion models at the energy end-use side. Furthermore, we have not at all commented anything related to Canada, or to political decisions there. This is not part of our analysis, and it would be better not to mislead readers in this respect. And finally, the GDP impact of the projected situation is calculated very carefully using detailed input-output tables of the economy of each of the 59 countries or regions in our simulation model. These are standard economic datasets, we can provide all the details if you need to properly understand them. Input-output tables tells the quantity of intermediate production that goes into final consumption, but also, if final consumption changes, the tables determine what the impact is across sectors through all of their interdependencies. We make no assumptions there, we use standard input-output tables, and the same is done in all existing multi-sectoral economic models. Remember that GDP is the sum of value-added across a complex set of industrial sectors. This is, in many ways, the very basics of economic modelling. Please note that our assumptions only take the form of policies, and the rest is mostly endogenous (i.e. modelled).

    I will concede that imposing trade tariffs on fossil fuels would change the picture that we paint. We did not address this possibility as there is no evidence suggesting that this would be so. Politically, we believe that it would likely be politically untenable to enforce higher fossil fuel prices domestically than internationally, and therefore we did not think this was a very likely possibility. Of course, you could turn out right, given the current trade policy debate in the United States.

    It would help the debate to rationally discuss about methods of analysis, and we would be very happy to do so in a civilised discussion. I believe you have our email addresses. I would also recommend you to have your arguments go through at least some basic peer-review process in a recognised journal, as otherwise, it doesn’t have the same impact when it takes the form of offhand incorrectly informed assertions on a random person’s personal blog. We would be happy to help you with improving that.

    Finally, we stress that there is no political motivation on our part, we are standard scientists analysing existing data and identifying trends in them, and publish our results in known scientific journals through a stringent peer-review process. It doesn’t matter where we are from (our team is highly multi-cultural and not particularly European). Nature Climate Change is such a highly regarded scientific journal that its editors are very careful in what they publish, especially regarding political bias. To be very clear, we are not based in Canada, and have no interest in political decisions made there, except for what scientific views we develop through our analyses. In the end, the study only addresses the financial risks of investing in fossil fuel assets, no more.

    Best wishes,
    Jean-Francois Mercure

    Like

    • Blair says:

      Thank-you for the detailed reply a few comments:

      Given the nature of the political debate in Canada right now (the Trans Mountain pipeline purchase being headline news) I chose to do a hot take blog without seeking the complete details from your report. I recognize that my review was not comprehensive but I stand by my comments with the proviso that my language at times was imprecise and I will edit the post to clean it up and ensure it doesn’t make negative implications as I recognize your work is well done but is being used in the political sphere in a manner for which it was clearly not intended.

      Regarding Table 8 I agree I used the incorrect word “assumptions” in the early paragraph when it should have read “conclusions” as I discuss in the later, more detailed assessment. As I discuss, while I do not have access to your model any model that predicts an almost 10% drop in agricultural production for Canada under a climate change scenario is a model that needs to be returned to the shop for tuning. Similarly, since our metals extraction is primarily for export your model, assuming that decreases in domestic consumption will result in a dramatic drop in metals and minerals extraction, is simply not realistic especially given the increased demand associated with re-tooling our economy for renewables which are heavily dependent on these raw materials.

      I recognize that your article went through an extensive peer review but it is clear that the report did not incorporate critical features highlighted in my blog post. This is not a failing of the peer-review process, just a reality that a short letter cannot include all the information necessary and given the nature of the political debate in Canada, considerations you explicitly ignore are pretty darned important to our national debate.

      I would argue that your statement “this debate is about the demand for fossil fuels, not really about their supply chains” is puzzling in that ignoring how fossil fuels are used and transported defines their price and to omit that information leaves your analysis open to significant criticism. As I pointed out in my post the price differential you use ignores what would ultimately represent substantial transportation costs. This is a clear oversight as transportation costs are real costs that would completely change the rate at which facilities are retired. I’m not sure how you can say you don’t comment relative to Canada, rather, you single out Canada and the US in your graphs as regions that would be particularly badly affected but to then disregard how domestic fuels are used seems an important omission.

      When you write “we believe that it would likely be politically untenable to enforce higher fossil fuel prices domestically than internationally” I would ask upon what do you base that belief? Canada has consistently used a taxation scheme that results in substantially higher fossil fuel prices (gasoline, diesel, fuel oil) than our southern neighbour and has done so for decades without problem. Many oil producing countries have similarly subsidized their domestic fuel prices heavily (see Venezuela, Saudi Arabia, UAE) to allow for lower domestic prices. To suggest that the US, when faced with losing control over a critical military resource, would go without tariffs is simply not realistic in our current geo-political climate.

      Thanks-you for taking the time to comment and for doing the work you do as it provides helpful insight into how our world is changing and what those changes may entail.

      Liked by 1 person

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