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Where to find cheap oil?

A physicist, a chemist and an economist are stranded on a desert island when all of a sudden a can of beans floats ashore. The physicist identifies the pressure points in the can and proposes pounding them with a rock the chemist wants to put the can in a fire and wait for it to explode. “No, no, no,” says the economist. “Let us assume a can opener.”

The point is that macroeconomics seems based on faith that supply will come as long as demand is high. Everyone would like to believe this, but when it comes to oil, it’s sheer fantasy.

Today (Thursday, March 29), the federal government hands down an austerity budget – but don’t look for parsimony when it comes to the oil industry. The feds are still throwing about $1.3 billion yearly at this sector based on that obsolete assumption.

According to a new analysis in Nature magazine by James Murray and David King, price increases for fossil fuels every year since 2005 – a seldom-acknowledged factor behind the enduring recession – have not coaxed any lower-cost supplies of oil or gas out of the ground or oceans, despite the predictions of classic economics. The only possible explanation is that it won’t come when called because it doesn’t exist.

The authors confirm what many have been saying: supply-side reality will force more governments to jump on the conservation bandwagon than any threats of global warming.

Subsidies for oil, at a time when oil companies are making record profits, send a very dismal message, which perhaps explains why U.S president Obama has recently called for their abolition. Using public money for this industry is an advertisement for irrational behaviour. Making a product cheaper only means people use more of it, so folks are now accustomed to jumping in their cars and driving 2 miles to save a toonie on a bargain at Walmart.

The fact is, we need a 1,000-year plan for fossil fuels because we actually need them. There is a range of products – strong, light flexible, strong plastic items such as those used in hospitals and in other socially useful contexts – that require taking this resource out of the ground.

So we have to conserve the resource, take it only as needed and use it smartly and for maximum productivity. This viewpoint is becoming common among enviros and explains why many are now calling for a radical slowdown on tar sands development.

The new thinking also identifies the problem of “Dutch disease”: an economy’s emphasis on resource extraction, as in the tar sands, raises the value of the country’s dollar, undermines manufacturing and ruins things for producers of other products – the resource economy literally strangling the creative economy.

Besides a slower pace of development, many are calling for an end to sending raw bitumen out of Alberta without refining it there and creating secondary industries.

Stopping the wasteful search for new supplies to focus on resource productivity is at the centre of what McKinsey Global Institute, a leading economic consulting firm, calls a much-needed “resource revolution.”

Their report, released in November and based on input from some 100 senior scientists and economists, argues that because cheap resources could be assumed during the 1900s, all attention was focused on making labour more productive and less costly. Now, however, that attention must shift to making resources more productive through all the measures enviros have been pumping, from energy-saving appliances to hybrid cars, increased tree-planting, etc.

To make this happen, the document points out, oil subsidies need to be identified as a waste of money. Governments could be investing those same dollars in conservation, green tech and increased oil productivity. That, plus a $30-a-tonne charge against carbon, could be offset by a global employment bonanza of up to 25 million jobs.

This seems to be the secret of Germany’s success as an economic powerhouse that treats its workers relatively generously. Since 1999, eco taxes imposed on energy bills have driven efficiency changes in cars, factories and homes, which has led to cuts to taxes on payroll and social security and the creation of 250,000 new jobs, according to McKinsey analysts.

Few of the report’s initiatives seem to require rocket science. Many are already the declared policy of Toronto, though more honoured in the breach than the observance: energy-efficient buildings, repairs to prevent municipal water leakage, urban densification and reduction of food waste, for example. Other recommendations might strike some observers as common sense – increased farm yields and reduced consumer goods packaging, for example.

One might say the list is so common-sense that it’s eminently do-able, much as it goes against the grain of business – and austerity – as usual.

news@nowtoronto.com | twitter.com/nowtorontonews

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