The market failure of tar sands extraction

As fossil fuels are becoming rarer, some of the more controversial methods of extracting them from the earth are advancing. This move is driven by two factors. One is the rising need for fossil fuels in the developing world and the lag of alternative energy sources behind conventional fuels. The increase in energy prices is thus making is feasible to look for fossil fuels in ever more remote areas of the world. Deep sea extraction of oil is one of the consequences. One source of oil however is fairly close to the surface yet used to be prohibitively expensive due to its enormous amount of water and chemicals it needs, as well as its poor cost-benefit ratio: tar sands. 

The Canadian province of Alberta is rich in tar sands, so much so that it is estimated that there is more oil in the Canadian province than in Saudi Arabia. The problem is not that it is deep underground. In fact, tar sands are mined in open cast mines. The difficulty with tar sands is that the oil is not liquid but semi-solid and tied in with other minerals. To separate the oil from the sands is a costly and energy intensive process. So much so that the final tally of energy gained from tar sands is only 5 times to that put into extracting it. 

But tar sand extraction also incurs huge environmental costs since the sands are extracted in surface mining. The pictures of open cast tar sand mining are reminiscent of open cast coal mining which has contributed to the devastation of huge swathes of the Central European landscape. Yet there is an additional factor that makes tar sands problematic. Separating oil from the other elements requires a toxic cocktail of chemicals which are then slushed out into huge open air ‘lakes’. Presently, returning water from these lakes into natural water supplies takes about 40 years, process that is called 'tailing' and has only occurred once in Canada. 

Tar sand extraction in Alberta

Yet, as fossil fuel prices rise, tar sand extraction becomes ever more feasible, so much so that President Obama is considering a proposal for a pipeline from Alberta to the US refineries in the South to meet the energy needs of the US. 

Independent research has shown that tar sand extraction in Alberta has devastating costs for people living in the area (the area affected is currently about 485 sq km, the Alberta government plans to expand the extraction area to the size of France in the next couple of years). Cancer rates amongst native Canadian, the Inuit, are seven times higher as normal, and fish from the delta contain three times as high an amount of toxic chemical (mercury and cadmium). The Albertan government disputes these findings but refuses to appoint independent researchers to verify them. 

So, what’s the solution? Tar sand extraction is driven by rising energy prices which makes this type of extraction financially viable. High energy prices will stay with us for the foreseeable future, so hopes that the development of cheap alternative energy sources will put an end to this practice are motivated by wishful thinking at best. 

The only way out of this dilemma seems to be radical change of thinking about the costs of energy production. At present, energy companies engaged in tar sands extraction can claim huge subsidies. This makes tar sand extraction a highly profitable enterprise, almost twice as profitable as conventional oil drilling. But this is only part of the story. 

Companies can also offset many of the costs of oil extraction to the local communities by discounting so-called externalities. What does this mean? The immediate costs of production are part of the price of the final product, such as investment in machinery to extract and transport the product. The long term costs of extraction activities are however not calculated into the price. Increased health costs for cancer care amongst native Canadians in the area are shouldered by the state government. And the long term environmental costs are not even considered (beavers have virtually disappeared in the delta and water sources are contaminated). As long as extraction companies can disregard theses externalities, energy prices of oil from tar sands will not reflect the real costs of its production. 

In effect, tar sand extraction prices are a result of a distortion in the energy market. Production companies obtain huge subsidies from the government, discount the real costs and risks of tar sand extraction while the public foots the environmental costs and health care bill. Readjusting the market price for tar sands to properly reflect its externalities may be a first step to solve this environmental and moral dilemma.