Cold War, Inflation and Spiking Oil Prices: Q&A Through Déjà Vu

Why am I waking up feeling like it’s the 1970s?

Russian aggression, superpower confrontations, inflation, spiking energy prices and fears of disruption—it’s all déjà vu for Cold War veterans (like me).

Environmental degradation was top-of-mind in the ‘70s too. Acid rain, Three Mile Island, smog and leaded gasoline were among many earthly problems furrowing our brows and debasing our planet. Somehow, we dealt with it all.

Society feels good when their energy is formulated with four basic features: Cheap, clean, safe and secure.  History tells us it’s hard to achieve all four at the same time.

For much of the past 10 years, we in the industrialized world felt like we had three of the four features: Cheap, safe and secure. Climate change dogged the clean dimension, but we were working on it.

The fallout from the Russian invasion of Ukraine is that we are losing our grip on the cheap-clean-safe-secure paradigm of energy—yet again.

Energy is no longer cheap—rising oil and natural gas prices are putting an end to affordability. Climate change and achieving net-zero carbon emissions remains a massive undertaking. And choking off the Russian energy economy is removing any feelings of safe and secure.

Russia is an uber producer of oil and natural gas. By volume, the vast, resource-rich country is a top exporter alongside Saudi Arabia, and a dominant supplier of hydrocarbons to Europe. Military action, financial sanctions and other uncertainties in the fog of the Ukrainian war means the usual flow of global energy will be disrupted—it’s not a question of if, but of how much harm will be done in the days and weeks to come.

Naturally, there are many questions about what will happen and what can be done to preserve the cheap-clean-secure paradigm. Here are some:

To what extent can Canada help Europeans be more energy secure?

Canada is the fourth largest producer of oil and gas in the world. Unfortunately, there isn’t much we can do for our European friends in the near term.

The vast majority of Canada’s oil production comes from Alberta and Saskatchewan. Our export pipelines dominantly point south to the United States. Years of pipeline squabbling has led to stagnation in our ability to access export markets.

The contentious TransMountain Expansion pipeline isn’t likely to be finished until late 2023. Some people question whether it will take even longer, given the resistance to the project. Regardless, the geography is wrong: A Pacific export terminal is not on the right coastline to serve Europe efficiently. Nor will the expanded TMX terminal have the capacity to load the world’s largest tankers that make the long journey to the other side of the world cost efficient.

Oil from offshore Newfoundland is available, but it’s spoken for and only about 5% of Canadian production.

What about Liquefied Natural Gas (LNG)?

I dug up some old presentations from 2014. Back then there was much talk about Canadian LNG export terminals. At the peak, I counted 18 live proposals on the BC coast. In the end only one project, LNG Canada, made it through the arduous approval mill. Today, the Kitimat-based facility is under construction, but not likely to be in service until 2025—and that’s assuming the Coastal Gas Link pipeline makes it there in time without further incidents.

The proposed Saguenay LNG project in Quebec made much more sense for serving Europe, but it was rejected by the province in 2021 and by Ottawa only three weeks ago, encountering regulatory and political resistance familiar to natural gas projects.

Are there other ways to serve Europe with Canadian oil and natural gas?

Canadian production can transit through American pipes and ports to get to Europe. However, over the past five years Canadian hydrocarbon output has leveled off in response to climate policies, the supply chain ravages of the pandemic, limited pipeline export capacity and investor directives to return cash to shareholders in lieu of drilling. So, for now Canada doesn’t have any extra capacity to fill Russian supply gaps, even if it had the ways and means to deliver more.

Won’t high prices accelerate the transition off oil and gas?

Yes, high oil and gas prices are a force for transition.

In fact, energy price spikes and security concerns have historically been a more powerful force for change than environmental pressures. However, what happens is not straightforward. Energy price shocks usually spark a dual track of transition: near-term and long-term.

First, there is an immediate response to get off the high-priced commodity by substituting with the next cheapest alternative. Because the world is still 80+% on a combustion paradigm, the fastest switching is within the carbon complex. When oil and gas prices spike, there is usually a regressive transition back to burning coal in industrial plants and power generators.

When residential natural gas prices rise, people are known to switch to wood fireplaces. Of course, that only works if wood is cheaper in giving off the same heat.

Historically, there are many instances of switching between fossil fuels as prices fluctuate. For example, the 2007 run up in oil prices to $100-plus per barrel triggered almost a one million-barrel-a-day equivalent consumption switch to natural gas in US industrial facilities. That trick worked in the past, because natural gas was far cheaper than oil during the shale revolution.

Switching within the fossil fuel complex to make energy cheaper and more secure is challenging in the current crisis. All commodities have run up in price, and in western jurisdictions there are various levels of carbon levies that makes the decision to switch between fossil fuels less obvious.

Finally, the need to ‘get off oil’ has been amplified every time it’s become geopolitically too hot to handle. A call goes out for more public spending to encourage long-term alternatives. In the 1970s, atomic power was heavily subsidized, recognizing that it was a technology-in-waiting to displace oil in power plants. A transition occurred, but it took years to build out a fleet of nuclear plants.

I expect we’ll hear increased calls for oil alternatives soon. The narratives will build on climate change policies that have already been encouraging transition for several years, so the process won’t be off to a cold start. The challenge will be price inflation for raw materials that go into clean tech products like batteries. Russia is a major source in the global trade for metals, minerals and other natural resources—sanctioning their suppliers creates shortages and drives up prices.

So, what does all this mean?

Unfortunately, there are not a lot of near-term options for supplying cheap, clean, safe and secure energy.

Potential releases of oil from strategic petroleum reserves are meant for bridging short-term disruptions; this wound is too deep for such small band-aids.

Déjà vu analysis tells us that it’s the demand side that will have to give. Spiking commodity prices will almost certainly induce economic slowdown, like it did during the oil price shocks 50 years ago. Some even suggest $100 oil was a catalyst for the 2008 Financial Crisis.

As I flash back to the 1970s, I realize there is nothing unusual about what we’re experiencing. What was unusual is that we had a 10-year period where we were led to believe that cheap, safe and secure energy was a given.