The Carbon Bubble

What happens to us when it bursts

by Jeff Rubin

The Carbon Bubble book cover • If you want to know a thing or two about bubbles, just ask a kid. At some point or other, many of them have mixed dishwashing liquid with water and hit the backyard running, with a small plastic wand. The result can seem a little like magic: weightless, ephemeral balls floating on the breeze.

What any kid will tell you, though, is that bubbles aren’t built to last. As they float ever higher in the sunlight, they inevitably pop. In a flash – poof! – they are gone.

Canada’s carbon bubble, like its backyard cousin, is popping. For nearly a decade, the country has been chasing Prime Minister Stephen Harper’s dream of becoming an energy superpower. It’s a dream the Conservative leader laid out shortly after assuming office in 2006. At the time, it seemed a solid-enough plan: the world needed oil to power economic growth and Canada had oil, in spades. And for a while at least, it seemed to work. The oil sands – the Harper government’s anointed engine for the country’s economic growth – ramped up production. Oil prices rose to unprecedented triple-digit highs and took the Canadian dollar along for the ride. Investment dollars poured into the oil sands, oil royalties poured into the Alberta Treasury, and Fort McMurray became a 21st-century boomtown. On the surface, everything seemed to be coming up roses.

portrait of Jeff Rubin
Jeff Rubinphoto by Kathryn Hollinrake

But from today’s vantage point – with world oil prices dropping to levels not seen since the Great Recession and demand for the fuel softening even in traditionally solid markets – it’s clear that the journey to realizing Harper’s vision wasn’t destined to be all smooth sailing and fair weather. The country’s master economic plan was predicated on some key assumptions: that oil prices would inexorably move higher; that our neighbour and the world’s largest oil-consuming nation, the United States, would continue to have an insatiable appetite for our high-cost fuel; that the economy of the world’s second-highest oil-consuming country, China, would grow indefinitely at double-digit rates, single-handedly driving world demand for oil as it had once done for coal; and that emissions from the extraction and processing of bitumen, one of the dirtiest carbon fuels on the planet, would not count in the face of the world’s laissez-faire pursuit of growth.

Since 2006, one after the other, each of these assumptions has fallen by the wayside, and Canada’s oversized oil industry – and its whole oil-driven economy – is paying the price. As the carbon bubble bursts, billions of dollars of investment and government royalties, not to mention thousands of jobs, are vanishing just as quickly as that iridescent sphere that once floated even higher in the sunlight. Poof!

Financial bubbles are, of course, nothing new. They have been a recurrent theme throughout modern history. While they’ve taken different forms over the centuries, at their core, they are essentially the same.

In the 1600s, Holland’s upper classes went berserk for an unusual status symbol: tulip bulbs. By 1636, the bulbs were trading on the stock exchanges of many Dutch towns and cities, encouraging everyone to speculate. At the height of the craze, the rarest bulbs commanded as much as six times an average person’s salary. Ten years later, prices dropped and a massive sell-off began, leaving many people in financial ruin.

In 1711, the South Sea Company presented the British government with an IOU for £10,000,000 in exchange for the rights to handle all trade with South America. Investors swarmed, paying as much as £1,000 per share. Nine years later, those shares were worth nothing. South America remained firmly under Spanish control and the British trade rights for the region were worthless.

More recently, the world witnessed the greatest financial meltdown of the postwar era when securities financed by subprime mortgages given to unsuitable borrowers crashed as delinquent payments triggered a collapse in US housing prices. The mortgage-backed securities, which had been assigned the highest rating by credit rating agencies, were widely held by financial institutions around the world, many of which failed or required massive, publicly funded bailouts.

All of these bubbles had something in common: like Canada’s current “energy superpower” dream, they were built on false premises. People just weren’t going to continue sinking years’ worth of earnings into a status symbol that bloomed for two weeks and then went into hibernation. They weren’t going to keep pouring money into a company whose British charter to control trade was meaningless in a Spanish- ruled region of the world. And US real estate values simply weren’t going to climb forever, particularly when insolvent homeowners financed by subprime mortgages mailed in their keys and just walked away from their payments. In all of these cases, a correction was bound to occur, and occur it did, with horrific repercussions for those who failed to see the writing on the wall.

And now it’s our turn. No sooner have we turned the page on the subprime mortgage bubble than we find ourselves facing what could be an even more daunting one. While Canada escaped relatively unscathed from last decade’s Wall Street–centred crisis, it won’t be so lucky this time around. The country’s oil sands–leveraged economy is at the epicentre of the bursting global carbon bubble. No oil industry in the world is more vulnerable to plunging prices than the oil sands, home to one of the planet’s most costly and emissions-intensive oils. In today’s convulsive oil market, where record-sized boom-bust price swings have become the norm, those high costs leave the oil sands’ future very much in doubt – and the Canadian economy suddenly in need of a new engine for its growth.

This, then, is the fallout of chasing Harper’s dream. Finally, we look to the future. How can you, as an investor, manage the turbulent times that a bursting carbon bubble brings and how can the Canadian economy weather the storm? While slower growth and a warming climate may indeed sound the death knell for what until now has been seen as the country’s most valuable economic asset, the latter, at least, could offer more than a silver lining or two.

As a high-latitude country, Canada’s climate will change more than most, and as it does, new economic opportunities will emerge. In fact, the climate change that the Harper government has been so fervently trying to deny may present far greater economic opportunities for Canada in a carbon-constrained future than we ever had in our oil-soaked past. In seizing these opportunities, we will soon come to realize that oil is not our most valuable resource after all. That title will soon belong to something Canadians often take for granted, but that others – like residents of, say, California – no doubt wish was a little more abundant in their neck of the woods. Water, it turns out, is about to become a whole lot more valuable and important to our economy than it’s ever been before.

Recently, one of this country’s national newspapers dubbed the oil sands the “business story of the decade.” But the headline told only half of the story. The rise of the oil sands is certainly one of the biggest business developments ever to grip the Canadian imagination. And why not? Enormous expansion, huge numbers of jobs, a steady stream of revenue – it’s compelling, to be sure. Today’s newspaper headlines, however, are telling the other half of that story – the fall. And this part reads very differently. Instead of stories of massive expansion connected to gleaming new pipelines, we’re reading of extensive layoffs, abandoned projects and scaled-back operations. As the world turns away from high-cost fuel and carbon emissions, the oil sands’ imprint on both the landscape and the economy is going to get a lot smaller.

It may seem hard to imagine a future beyond the carbon bubble – when the economy and the country’s ambitions are no longer all about oil. But you’re about to discover that this future is closer than you think.

Making your way through a conversation about climate change, fossil fuels and the economy can be a bit like navigating the tricky terrain of J.R.R. Tolkien’s Middle Earth. The landscape is rocky, there are fire-breathing dragons at every turn and you’d better be on the alert for enchantments that can make the truth seem like fiction, and vice versa. Partway through, you find yourself wanting nothing more than a map marked with a big red dot and three familiar, comforting words: you are here.

As any traveller can tell you, knowing where you are is important – in Middle Earth or anywhere else. If you don’t know where you’re starting from, how can you figure out where you’re going? How can you avoid getting stuck in the no man’s land between Bag End and Mordor? Or, more to my point, between a carbon-shrouded past and a renewables-fuelled future?

So where are we? The answer to that question, unfortunately, is “in a bit of a mess.” For decades now, we’ve looked the other way as global temperatures and sea levels have risen, as the ice caps have shrunk and as greenhouse gas emissions have grown unchecked. Despite mounting evidence to the contrary, we’ve chosen to believe that we can go on living the way we’ve always done. We can’t. Our past choices are catching up with us, quickly.

If you happen to call Canada home, things are bleaker still. You reside in a country whose government has not only been wilfully turning a blind eye to the problem but has also been building the country’s economic future on a foundation of high-cost, emissions-intensive heavy oil – a foundation that can’t possibly hold as climate change forces us to move away from our unhealthy reliance on fossil fuels.

This failure to truly see where we are, and to act accordingly, is going to have repercussions – for the economy as a whole, and for you. In order to avoid those repercussions, you first need to understand them. You need to know, in other words, where you are.

Excerpted from The Carbon Bubble by Jeff Rubin. © 2015 Jeff Rubin. Published by Random House Canada, a division of Random House of Canada Limited, Penguin Random House Company. Reproduced by arrangement with the Publisher. All rights reserved. [Editor’s note: We encourage Common Ground readers to read this very important book.]

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