We may be at the start up of a new energy transition. A revolution so dramatic that it promises to take us 360 degree back to where we were only a few decades ago! The age of new oil is upon us. The oil companies have come out of their closets and allowed us a glimpse of a new future. A world with low (”manageable”) risk oil exploration, decreasing prices, and ramped up adaptation to climate change: we should be so fortunate!

So how is the oil industry leading the revolution? The charm offensive includes four broad arguments aimed at the general public:

First, We know what we are doing. Led by Shell its charm offensive has been to focus on the Arctic. As noted in its arctic-ready website Shell is “committed to not only recognize the challenges such exploration brings” but plans to “take advantage of its tremendous opportunities”. Others make the case that lessons from the Gulf of Mexico have been internalized and that risks of exploration are manageable. The search for new oil is taking a major turn towards some of the last outposts of our planet. Alaska, Northern Canada, Far East Russia, Greenland and Norway are all targets for major exploration and development. The oil companies seem in little doubt: developing substantial oil in the Arctic is a significant part of our global energy future. Other fragile sites are also under serious consideration by the oil industry: the tropical forests of Latin America, the coastal waters off Brazil, Argentina and Libya all appear as prime candidates. Even if ecological and other risks could be minimized there remains the little issue of greenhouse gases and their containment. Fortunately, as has been demonstrated, they know what they are doing.

Second, Climate change is manageable. We just need to adapt.  A recent interview in the Financial Times noted that “Global warming is manageable says Exxon Chief”. It suggests that the oil industry, while recognizing that climate change is a fact (already a progressive step for some!), remains skeptical about some of the science and also believes that all impacts can be managed. “So we will adapt to this” he said. It remains in Exxon’s mind “an engineering problem with engineering solutions”. Of course, what is less clear is how much it will cost, who will pay and by when. An issue oil companies manage to shy away from. Surely a carbon tax could dampen demand and provide some level of funding that could go some way to helping countries adapt. We used to believe in the principle of the polluter pays: shouldn’t the oil companies now be held responsible for the damage they cause?

Third, the era of cheap oil is about to be unleashed.  And now for the good news: New technologies can cut the costs of extraction and development. We may be moving back down the cost curve. The promise that oil will no longer keep rising is an appetizing one to the automotive industry and others. Production is set to grow: some have estimated that global oil output will grow from the present 93 million barrels a day to around 110 million barrels a day by 2010, the largest increase in a single decade since the 1980s.  But here is the rub: What does it really cost to produce a barrel of oil? Economists have long demonstrated the difference between financial costs (the costs faced by a company that includes all the internal costs of production plus adjustments for the taxes it pays and the subsidies it receives) and the economic costs which include the total full costs to the society at large (the internal costs as well as those external to the company).

Increasingly we are facing a situation with regard to the exploitation of our natural resources where the external costs far outweigh the internal costs. Of course, the oil analysts and the industry generally care only about the financial costs of extraction, although some provide small offerings in the way of “social and environmentally responsible” activities in an around the  local sites. But what about the value of the land and water used, the potential local ecological damage, the social and economic costs due to the displacement of local people, and the costs to the planet of additional greenhouse gases?

These are not featured in any of the corporate cost calculus. The paradox is obvious: Moving down the companies’ financial cost curve may occur at the same time as we move up societies’ economic cost curve.  As costs of production decrease, increased profits are ploughed back into moving up the exploration cost curve resulting in investment in new oil fields.  Lower prices increase our dependence and use of oil and, through the impacts of increased greenhouse gases, massively increase both ecological risks and the costs of adaptation. Cheaper for whom you might ask: Certainly not for our environment.

The USA and Canada’s vast sand and shale oil and gas reserves are a point in question. Damage to freshwater systems, toxic and potentially carcinogenic sludge management, obliteration of pristine biologically important wilderness areas, the high energy needed for extraction, and the potential movement of local people matter little to the industry. As a global issue, a recent report released by Cornell University bears thinking about: the study estimated that shale gas extracted through fracking contributes as much to global warming as coal, if not more.   

Fourth, We believe in social and environmental responsibility.  Public relations departments in many companies have transformed themselves, as if by magic, into new centers of social and environmental responsibility.  Many are very serious about the transformation and deserve huge credit for leading the corporate sector towards a more enlightened era of corporate responsibility and accountability. The oil industry appears, at best, to have a mixed record. Certainly good works have been funded by the oil industry but budgets have been minuscule when contrasted with recent windfall revenues. Exxon, for example, has consistently funded think-tanks that have challenged the need to reduce greenhouse emissions. While, as noted in the Financial Times, a great deal of such funding has been cut, a remaining grant of fifty thousand dollars was awarded to the Heritage Foundation, a major climate denier think-tank. Hardly generous, it contrasts with the annual revenues of the company of over $ 450 billion and hardly progressive.

The reality is that we may have actually entered a new era of uneconomic oil where the full social, environmental and economic costs of oil extraction are larger than the benefits from oil use. And the risks of exploration in highly fragile ecosystems could cause unimaginable and costly ecological and economic damage. And of course, the global damage costs to the planet of remaining addicted to fossil fuels would be continued and extended well into the middle of this Century. We can, or at least we think we can, adapt at reasonable cost to a 2 or 3 plus degree possibility. Is this the risk we want to take? Would the oil companies be willing to be taxed to cover the full costs to the globe of incremental oil output? I doubt it.  The prognosis for massive fuel switching into non-fossil fuel sources of energy is in for a major set-back.

Should a call not go out to create an independent global commission on the future of oil for humanity.  A commission could look, in a professional and detached manner, at the real costs and the real benefits of oil extraction. By placing reasonable and understandable numbers on the table, including the value of ecosystem destruction and the range of values for the damage caused by greenhouse gases, an informed debate could ensue. And what is the economic relationship between emissions and adaptation in order to price and tax carbon correctly? Could this become a special theme for the IPCC to tackle in its forthcoming global assessment? If not, how will environmental activists react? Are we in for a new level of activism and social disruption as the oil companies remain deaf to the voices of reason and blind to the consequences of their actions?  Only time will tell.