Crude Awakening: How the Keystone Veto Dashes Canada's 'Superpower' Dreams

Oil prices are crashing and Obama has vetoed Keystone XL. Will Canada double down on its dirty tar sands?

Credit: Victor Juhasz

Barack Obama's veto of Keystone XL has placed the export pipeline for Canadian tar-sands crude on its deathbed. Earlier in February, the Environmental Protection Agency revealed that Keystone could spur 1.37 billion tons of excess carbon emissions — providing the State Department with all the scientific evidence required to spike the project, permanently. If the news has cheered climate activists across the globe, it also underscored the folly of Canada's catastrophic quest, in recent years, to transform itself into a dirty-energy "superpower."

In the minds of many American right-wingers, Canada may be a socialist hell-scape of universal health care and quasi-European welfare policies. But it is also home to 168 billion barrels of proven oil reserves, the third-largest in the world. Since ultraconservative Prime Minister Stephen Harper — famously described by one Canadian columnist as "our version of George W. Bush, minus the warmth and intellect" — took power in 2006, he's quietly set his country on a course that seems to be straight from the Koch brothers' road map. Harper, 55, has gutted environmental regulation and fast-tracked colossal projects to bring new oil to market. Under his leadership, Canada has also slashed corporate taxes and is eliminating 30,000 public-sector jobs.

Riding record-high oil prices — $107 a barrel as recently as last June — Harper's big bet on Canadian crude appeared savvy. The oil boom had driven a seven percent surge in national income, helping Canada ride out the Great Recession with less anguish than most developed nations. And with fossil fuels swelling to nearly 40 percent of net exports, Harper's Conservative government was on track to deliver a Tea Party twofer in advance of federal elections this fall: a budget surplus and a deep tax cut for the country's richest earners.

But today, with the price of oil cut in half, the Canadian economy is staggering. Tar-sands producers have clawed back billions in planned investments and begun axing jobs by the thousands. The Canadian dollar, recently at parity with the U.S. dollar, has dipped to about 80 cents. Instead of a federal budget surplus, economists are now projecting a C$2.3 billion deficit. "The drop in oil prices," said Stephen Poloz, the nation's central banker, in January, "is unambiguously negative for the Canadian economy."

If low oil prices hold, the pain will get worse. Most of Canada's reserves are locked up in tar sands. The industrial operations required to get the oil from the ground to your gas tank are not only filthy and energy-intensive — generating up to double the greenhouse emissions of conventional oil — they also take years of construction to bring online. Because of investment decisions made during the boom years, tar-sands production is projected to expand by seven percent this year, exacerbating the glut. The collapse of crude is threatening to take Harper's nearly dec-ade-long rule down with it. Canada's Liberal party, headed by 43-year-old Justin Trudeau (son of legendary Canadian PM Pierre), is running neck and neck in the polls, and bashing Harper where he used to be strongest — his management of the economy. "It's not fiscally responsible," said Trudeau in January, "to pin all your hopes on oil prices remaining high, and when they fall, being forced to make it up as they go along."

As we, in the United States, consider the fate of our own massive oil reserves and confront the specter of yet another Bush presidency, Stephen Harper's Canada offers a cautionary tale — about the economic and political havoc that can be unleashed when a first-world nation yokes itself to Tea Party economics and to the boom and bust of Big Oil.

Stephen Harper came of age in Alberta, a land of cowboys and oil rigs sometimes referred to as "Texas of the North." He began his career in the mailroom of Imperial Oil (today an offshoot of Exxon). He rose through Parliament promising a revolution in federal affairs under the battle cry "The West wants in!" Following his election to prime minister in 2006, he wasted little time unveiling his plan to open up his nation's vast oil reserves. Before an audience of British businessmen in 2006, he spoke of "the emerging energy superpower our government intends to build," and rhapsodized about the "ocean of oil-soaked sand [that] lies under the muskeg of northern Alberta." He framed the challenge of bringing that crude to market as though it were a Wonder of the World. "It requires vast amounts of capital . . . and an army of skilled workers," he said. "It is an enterprise of epic proportions, akin to the building of the pyramids or China's Great Wall. Only bigger."

Championing dirty oil meant that Harper had to undermine traditional Canadian values — including environmental stewardship and international collaboration. In 2011, Canada unceremoniously abandoned its climate obligations under the Kyoto Accord, which Harper had once blasted as "a socialist scheme to suck money out of wealth-producing nations." 

Under Harper, investment in the tar sands has surged more than 140 percent to C$59 billion. And the value of Canadian crude exports has more than doubled, to C$82 billion. In the process, northern Alberta has become an environmental sacrifice zone: Tar-sands strip mining has created an apocalyptic landscape of oil-scarred tundra and toxic wastewater ponds.

Today, the tar sands produce nearly 2 million barrels a day. And the United States consumes virtually every drop: Canadian crude makes up 42 percent of American net oil imports. Until the current crash, it looked like the party was just getting started. In June, the Canadian Association of Petroleum Producers projected tar-sands output would double by 2025.

Canada has benefited from Harper's oil boom — though less than you might imagine. In a quirk of Canadian law, the federal government collects no oil royalties. Its fortunes rise, indirectly, from oil, benefiting only from GDP growth and the surge in corporate and payroll taxes. The province of Alberta does collect oil royalties: C$5.2 billion last year alone. But far from socking that money away in a sovereign wealth fund — as Norway has done, amassing a portfolio worth more than $800 billion — the province has pissed it away on tax cuts. In 2001, Alberta instituted a flat tax of just 10 percent. To keep the working class on board, Alberta's government eliminated health care premiums for the province's version of Canada's national health care. Ever since — notwithstanding years of inflated oil prices — the province has bled red ink, and it now faces a projected C$7 billion budget shortfall all on its own.

Alberta created nearly 50 percent of Canadian jobs in the past decade, but the province's good fortune actually hurt the rest of the country. Canada now effectively has two economies, and they work at cross purposes. When oil is booming, the Canadian dollar is strong. That undermines the traditional manufacturing economy by inflating the cost of export goods like Canadian car parts. "As the dollar was rising because of higher oil prices," Poloz said, it drove "destruction of the capacity to export."

Until now, the Harper government has been happy to sacrifice industry for oil. Speaking last June, near the peak in crude prices, Harper's dour finance minister, Joe Oliver, underscored the government's conviction that Canada's economic future hinges on massive oil reserves, not its Rust Belt manufacturing base. "The choice is stark," Oliver told a summit of the International Economic Forum of the Americas in Montreal. "Head down the path of economic decline, higher unemployment . . . and growing debt, or achieve prosperity and security now and for future generations through the responsible development of our resources."

If you think Keystone XL plays an outsize role in our national political debate, you haven't visited Canada lately. For years, the Harper government had pinned its hopes on this export pipeline to ensure the continued, explosive growth in tar-sands production.

Even under the best of circumstances, the economics of Canadian crude extraction are tough. It requires huge upfront capital expenditures in heavy machinery to strip-mine raw tar sands, separate the tarry bitumen with heat and steam, and then upgrade the sludge into a synthetic crude, liquid enough to transport. If capital requirements are higher, revenues from tar-sands crude sales are historically lower than for conventional oil. Alberta is remote and landlocked, and the primary refining capacity for the crude sits in the U.S. Midwest. This gives the refiners the upper hand. Even when oil prices were peaking last summer, Canadian oil traded at roughly $20 a barrel less than the benchmark price for West Texas Intermediate — costing the country billions.

Desperate to reduce, if not eliminate, that disparity, the Harper government has sought access to the global export market — where oil prices are set by supply and demand, not quirks of geography. Shipping oil at that scale requires pipelines. Thus, one of Harper's earliest priorities was clearing the way for infrastructure giant TransCanada to build an 830,000-barrel-a-day pipeline connecting Alberta's oil patch to American Gulf Coast refineries.

When plans for Keystone XL were announced, in 2008, it seemed like a slam-dunk. On his first international trip, in 2009, President Obama traveled to Ottawa, where he and Harper began negotiations over tar-sands crude. In 2011, Hillary Clinton's State Department released a report finding the pipeline would create "limited adverse environmental impacts."

Then, almost overnight, under the leadership of climate activists like Bill McKibben and, Keystone XL became an emblem of the fight against climate change. Harper was shocked when Obama called in November 2011 to tell him the project — a "no-brainer" in Harper's mind — was now on hold.

Attempting to break the logjam, Harper began pitching tar-sands oil abroad. In February 2012, he took his pitch to America's chief economic rival, China. "Ninety-nine percent of Canada's energy exports go to one country — the United States," he told a crowd of executives in Guangzhou. "It is increasingly clear that Canada's commercial interests are best served through diversification of our energy markets."

No longer able to bank on Keystone, the Harper government embarked on a mad rush to approve pipelines to ports on both of Canada's coasts — only to discover that anti-pipeline fervor had migrated north. In 2012, Joe Oliver, then the natural-resources minister, lashed out at "radical" environmental groups for attempting to "hijack" Canada's economy. Their crime? Seeking mandated reviews of pipeline projects, spills from which would endanger fisheries, drinking water and fragile ecosystems. 

To avoid a crimp in production, the tar-sands producers said they needed at least one export pipeline to come online by 2018. So the Harper regime proceeded to rewrite bedrock environmental law, jamming through 150 pages of deregulation on the back of the federal budget in 2012. Heavily influenced by the oil industry, according to documents leaked to environmental groups, the legislation slashed protections for waterways and replaced mandatory environmental impact reviews with assessments performed only at the discretion of political appointees. Ecologists decried the budget as the worst setback in environmental law in more than five decades. Worse: Harper's government now insists it has no authority to weigh climate impacts when permitting pipeline projects.

But far from speeding pipeline construction, the Harper government's overreach has led provincial and First Nations stakeholders to fight back — stalling two pipeline projects that would carry Alberta crude across the Canadian Rockies to the Pacific Coast. Last May, the Harper government gave its approval to Northern Gateway, a 525,000-barrel-a-day pipeline terminating in a small port town near the Alaska border. But the project has bogged down, facing hundreds of provincial regulatory hurdles and now nearly a dozen lawsuits from First Nations that would bear the environmental impacts of construction and supertanker traffic. Similar opposition has stymied a proposal to triple the capacity of the existing 300,000-barrel-a-day Trans Mountain pipeline — which stretches from the oil patch to climate-conscious Vancouver.

Blocked to the south and the west, the Harper regime has thrown its weight behind the $10 billion Energy East project — TransCanada's "plan B" to Keystone XL. The pipeline would carry a third more oil, 1.1 million barrels a day, and stretch across four time zones to the Atlantic Ocean deepwater port of St. John — before being loaded onto tankers and shipped to refineries as far away as India.

As elections approach this fall, Harper is vulnerable on all fronts. The collapse in crude has thrown his economic agenda into disarray. The Conservative government won't even reveal its budget – originally expected in February — praying that a quick rebound in crude prices might fix the hole in federal finances.

In December, Harper angered climate-conscious voters by abandoning a pledge to put a price on carbon. "Under the current circumstances," he said, "it would be crazy. . . . We're not going to kill jobs, and we're not going to impose the carbon tax."

And Harper's failure to broker a deal with Obama on Keystone XL has stirred resentment with voters in the western provinces. When Trudeau spoke before the Calgary Petroleum Club in February, the crowd broke into spontaneous applause after he slammed Harper over the "broken" relationship with the United States: "[The] prime minister has demonstrated . . . that he just doesn't play well with others."

Far from speaking truth to power to Calgary's oilmen, Trudeau is pitching himself as a liberal who can at once rebuild international trust in Canada's environmental ethics and bring the tar sands to market. He says it's unfair that Canada's oil sands have been made the poster child for climate change. And he dismissed environmentalists and the belief that "if you block the pipelines, you can shut down the oil sands and save the planet." That thinking, he added, is as "simplistic as it is wrong."

Unfortunately, the science tells us that this "simplistic" thinking is entirely accurate. A January paper in the journal Nature, modeling the unburnable fossil-fuel reserves across the globe, concludes that 99 percent of Canada's tar sands must stay in the ground to keep global temperature rise under catastrophic levels. As a policy matter, that means winding down production in the next five years — with mining of Canadian bitumen dropping to "negligible levels after 2020."

None of Canada's major political parties are providing the leadership to put the country on that path. But the free market and depressed oil prices could force such changes all the same. A study of the national oil and gas industries published in January by investment research firm CanOils warned that fewer than 20 percent of Canada's oil firms "will be able to sustain their business long-term."

Existing tar-sands operations will yet be able to cover their cash costs at $50 a barrel, CanOils writes. But because of the massive startup costs required, most new investments in oil-sands production simply won't pencil out. If the markets become convinced that cheap oil is here to stay, producers won't be able to borrow against future reserves and financing will dry up. "Canadian oil production, on the whole, appears unsustainable in the long run at $50," the report concludes. Adding to the grim forecast, Goldman Sachs analysts said in January that they think the oil slide won't stabilize until prices hit $30 a barrel. Citibank was even more bearish, forecasting the price of a barrel falling to $20.

Canada, indeed, stands at a crossroads. It can continue down Harper's chosen path, unearthing billions of barrels of filthy fossil fuels and shackling its economy to the volatile trade in a single commodity — becoming rich or going broke at the whim of the oil markets.

Or it can take advantage of the collapse of crude prices to return to a more sustainable economy — as a currency-advantaged exporter of goods and services to its southern neighbor, the most voracious consumer economy on Earth. But even if Canadians oust Harper in October, a transformational change away from the nation's new petro-economy appears remote. " 'The West got in,' " Trudeau conceded to the audience at the Calgary Petroleum Club. "And it will remain in."