Economics Individual Assignment

Economics of the oil sands: its more than jobs and GDP (Canadian Case study)

Submitted By
Nitin Bighane Roll no. 224

Introduction
Oil sands, tar sands or, more technically, bituminous sands, are a type of unconventional petroleum deposit Oil produced from bitumen sands is often referred to as unconventional oil or crude bitumen, to distinguish it from liquid hydrocarbons produced from traditional oil wells As of 2007, crude oil prices were significantly in excess of the average cost of production, which was about $28 per barrel of bitumen. However, bitumen production costs are rising rapidly, with production cost increases of 55% from 2005 to 2007, due to shortages of labor and materials In mid-2007, Royal Dutch Shell announced that in 2006 its Canadian oil sands unit made an after tax profit of $21.75 per barrel, nearly double its worldwide profit of $12.41 per barrel on conventional crude oil According to the WEC, natural bitumen is reported in 598 deposits in 23 countries, with the largest deposits in Canada, Kazakhstan, and Russia Canada Oil Sands Worth $1.4 Trillion

Contribution of Oil Sands to Economy

Canada sends more than 99 percent of its oil exports to the United States, the bulk of which goes to Midwestern refineries for refining and processing

The oil sands resource is mind-bogglingly large approximately two trillion barrels of oil in place of which up to 315 billion barrels are technically recoverable. Statistics Canada puts the present value of bitumen reserves at almost $285-billion dollars.
While production currently sits at just over two million barrels a day, this is expected to more than double by 2030. But, is more production always good? Not necessarily The planned 1,700 mile Keystone XL pipeline can transport up to 830,000 barrels of oil a day, or half of what we currently import from the Persian Gulf to U.S. refiners Thousands of jobs will be created from construction of this pipeline. And the potential trade impact on jobs is even greater. That is because for every dollar spent on Canadian exports, such as crude oil, up to 89 cents is in fact spent on imports of U.S. goods and services to Canada. OPEC spends just 33 cents on U.S. imports. The potential trade impact of the pipeline equals 90,000 U.S. jobs every year Sector is enormously capital-intensive, with 16.5 per cent of Canadas capital stock

Other side of the coin-Adverse impact of oil sands on economy

Canadas economy is becoming too dependent on the oil sands

Increasing extraction costs are a good thing, higher extraction costs are economic impact, jobs, or benefits distributed along the value chain! These calculations ignore the fact that increased costs come at the expense of royalties, taxes, and profits. If they werent being spent on oil extraction, that money would be spent on other things we value, and the net impact on jobs and GDP would likely be neutral or close to it. If high extraction costs were good, wed extract the oil sands with spoons, not with 400 ton trucks. What would optimizing the value of this resource look like? It would start with the Alberta Energy Regulator assessing new projects with a true economic analysis, not one which simply equates spending with benefits. Allowing new projects generates direct economic activity, but may or may not increase the net benefits we derive from the oil sands. For example, if the inflationary pressures brought about by new projects increase total costs for the sector, these should be viewed as a cost of the development. If these costs get too high, development should be slowed. Just as a real-estate developer would not build too many condominiums at the same time because the combined impact would depress the market price, regulators need to take these impacts into account when approving oil sands projects. The discussion of the economics of oil sands must go far beyond GDP impacts and job creation. We must look at whether the value of this resource is maximized when all costs of extraction, including the environmental costs, are taken into account. Many signs suggest were not on that path today

Adverse Impact of Oil Sands on Environment

What about other costs like climate change? Almost every economics text book will tell you that youre generating false benefits if profits are under-pinned by costs or risks imposed on others what economists call externalities Even if those costs arent paid for by the producers, theyre paid by someone and a true economic analysis would take them into account Oil Sands account for 6.9 percent of Canadas GHG emissions Canada accounts for 2 per cent of global GHG emissions 1/600th of the worlds total emissions

Canadian sources of GHG emissions