Are you long or short on oil? Sound like a question that should be posed to a 23-year-old millionaire trading energy in New York rather than a reader of the Yukon News?
Well I’m afraid that you do have a “position” on oil, whether you know it or not.
This year you’ll make three or four big decisions that depend on where you think oil prices are going.
Should I buy a new SUV or a sub-compact?
Should I buy a new country residential lot?
Do those drafts mean I need to wrap the house in another layer of insulation?
The problem with all this is that it’s really hard to predict where energy prices are going.
The experts at the Bank of Montreal lost $680 million this year betting — I mean carefully implementing an investment thesis — on natural gas prices.
Last year, a cheeky young trader in Calgary lost $6.4 billion for investors in Amaranth Investors LLC.
But who cares about the Bank of Montreal?
Let’s worry about ourselves. We aren’t making $8 million per day to make up for bad energy decisions.
The place to start is the World Energy Outlook, produced by the International Energy Agency in Paris each fall.
Usually, the IEA’s reports go straight to recycling along with bumpf from other habitual report writers like the Basel Committee on Banking Supervision.
But this year the IEA’s energy gnomes earned their Parisian expense accounts, tossing out their usual muted language to use words like “alarming” and “abrupt escalations in oil prices.”
So what made these economists spill their Sancerre in alarm this year?
There are three big issues.
Demand growth. The whole world, but especially China and India, are growing so fast that energy usage in 2030 is likely to be more that 50 per cent greater than today. That’s what having another 250 million cars on the road in China will do.
Lagging supply. The IEA thinks there is enough oil left in the ground to meet this demand, although the Peak Oil theorists disagree vigorously.
But getting it to your SUV will require a staggering $22 trillion in investment in oil wells, refineries, pipelines, not to mention nuclear and coal power plants to keep your toaster going.
To make matters worse, oil and gas supplies in stable places like Texas and the North Sea are running out. We’ll be more dependent than ever on Iran, Saudi Arabia and Russia. Production from the Canadian oil sands won’t make a meaningful difference globally.
Climate change. The massive increase in energy use expected by 2030 will also result in CO2 emissions more than 50 per cent higher than today, and far higher than the Kyoto objectives of reducing emissions below 1990 levels.
As Al Gore will tell you, this much CO2 in the atmosphere could have major and possibly cataclysmic effects.
This is very bad news indeed for Yukoners.
Most of us have cars, houses and habits built for a world where oil is between $20 and $40 per barrel and there’s no limit on emissions.
Now the party may be over.
Around 80 per cent of Yukon energy use is fossil fuels, tightly linked to global prices.
We face a world where over the coming decades we could see oil steady at over $100 per barrel, spiking even higher every time there’s a revolution in Saudi Arabia or another hurricane in the Gulf of Mexico.
Plus increasingly panicky efforts by governments to clamp down on spiraling fossil fuel use as climate change becomes increasingly real: excise taxes, carbon taxes, emissions caps and so on.
So what should you do?
To avoid joining Bank of Montreal and Amaranth in the energy losers club, don’t make any big decisions without thinking about how high energy prices would affect you. For example:
a) Your car: Now would probably be a bad time to buy a Cadillac Escalade, for example.
If you commute daily 26 kilometres each way, drive to the cabin every other weekend, and make the odd trip to Skagway you’ll likely rack up around 16,000 kilometres a year. The Escalade will burn about 2,250 litres more gas than a Toyota Yaris per year going that distance.
That used to be affordable, but could be well more than $2500 per year if prices keep going higher.
b) Where you live: your big housing decision is probably location, not furnace or insulation. A country residential location that adds 36 kilometres a day or 8,000 kilometres a year to your commute is going to get more and more expensive.
Especially if you already got Question No. 1 wrong.
c) Your heating: Yukoners spend about $15 million per year on oil and propane. Strangely, we burn oil even when surplus energy is spilling through the dam in Riverdale.
We have a massive hydro-electric surplus 10 or 11 months of the year and, at some times of the day, even during cold snaps.
Even if the Yukon continues to ignore the examples of Nova Scotia, Ontario and Iceland and keeps electricity prices high and the same year round, electricity will start to become a reasonable option as oil prices climb.
Our electrical prices are also insulated against global oil price crunches and carbon taxes.
So next time you make a furnace decision, add heat pumps, thermal storage units and even plain old electrical baseboards to your list.
And write a letter to your MLA suggesting that we start using our electricity surplus and stop saving it for a future mine that might start up some day.
Hopefully some smart energy decisions can save you a few thousand dollars and a few megatonnes of CO2 emissions.
If not, you can always sell the Escalade and do what people did in Whitehorse 100 years ago: live downtown, ride a horse and chop a lot of wood.