Canada’s oil and gas patch is partying like it’s 2008, though most Canadian drivers are not enjoying the festive mood. Commercial rents in downtown Calgary are on the rise, and long-thought dead fossil-fuel export projects have zombified.
It’s no secret that the oil and gas industry is cyclical: as prices drop, the music stops, the lights come on. But historically, prices go back up, and the cycle repeats.
This time will be different, however. There is not likely to be another rebound in the oil and gas sector after this one. Governments at all levels need to acknowledge this fact and plan for how Canada will be competitive in a fundamentally changed economy.
Previous high oil and gas price cycles have driven consumers to purchase more efficient cars and better insulate their homes, while the business community found ways to use less fossil fuel. But what past instances lacked was a truealternative to fossil fuels.
Indeed, the great irony now is that soaring fossil-fuel prices will also contribute to the industry’s accelerated undoing. There will be no greater incentive for families and companies to shift away from something than brutally high bills amid broader inflation and a potential recession.
A March poll found that a majority of Canadians felt that high gas prices were here to stay – and could even go higher. We already know they were right about that last part.
The difference in 2022 is that this time, the incumbent has a fierce competitor.
Sales of gas-powered cars already peaked in 2017, and global automakers are racing to meet electric-vehicle (EV) demand. Meanwhile, new solar and wind power projects are now typically cheaper than the cheapest fossil fuel option. In 2021, new renewable energy projects with a combined capacity of about 230 Site C dams were built worldwide, according to the International Renewable Energy Agency.
For reasons that are both environmental and economic, global governments are placing their bets accordingly.
Germany’s new goal is to generate 100 per cent of its electricity from renewable sources by 2035, while China is planning for 33 per cent renewables by 2025. India leads the world’s major economies in renewable-electricity growth, with new capacity additions on track to double by 2026. And the U.S. is now using its Defense Production Act to spur the manufacturing of heat pumps and other clean technologies to further reduce fossil-fuel consumption.
If other countries with climate plans follow them, then global oil demand could peak as early as 2025, according to the International Energy Agency. Today’s high prices, combined with the war in Ukraine, are only accelerating the drive toward cheaper energy sources.
Given that crude oil is Canada’s largest export, the end of the fossil-fuel era could leave us financially frayed if we don’t proactively build up new industries. Indeed, a recent study showed that Canadian investors are among the world’s most financially exposed should fossil fuel assets become stranded.
Avoiding the worst of the hangover will involve a two-step process.
The shift away from fossil fuels is accelerating, and it will be permanent, so it’s time for politicians, especially Western premiers, to name the opportunity and talk publicly about what this generational shift in our economy will look like over the next two decades.
Second, governments must come together now and invest in future-proofed industries where Canada holds a competitive edge. Unlocking innovation and growth would also help Canada meet its climate targets while creating hundreds of thousands of new jobs across the country and across industries.
Plenty of good work is already under way. The federal government and several provinces have clean hydrogen strategies to replace natural gas for domestic use and export, and Canada is starting to attract multi-billion-dollar battery and EV manufacturing investments. Canada is also a top-10 source of the hugely in-demand metals and minerals required to manufacture clean technologies.
Our competitors are reinventing the ways in which they fund projects, incentivize industries, streamline processes and co-operate to attract new investments. To give just two examples, the European Union has set out a one-year deadline for renewable energy permitting, while Britain has released an energy security strategy to achieve clean-energy independence.
If Canada is to be at its most competitive, all levels of government must be on the same page.
The party always ends, but this time the club has been sold. We’re going to need to build a new one.
This post was co-authored by Merran Smith and originally appeared in the Globe and Mail.