Tarred and Tethered: Will America Opt for Tar Sands or Will Renewables Take the Starring Role?

The fight over the Keystone XL pipeline, designed to bring Canadian tar sands to U.S. refineries, is being billed as a make-or-break moment for energy: Will America place its bets on fossil fuels, or we will turn instead to more reliance on renewable energy? It’s an important debate, but one crucial point that’s often missed is that the economics of oil sands and renewable energy have something in common. When energy is cheap, neither stands much of a chance.

Oil sands are full of bitumen, a form of oil so thick that it’s more like tar (hence the term “tar sands”). There’s nothing new about oil sands—geologists and oil companies have known about them for a century. In fact, Canada has been refining oil from oil sands since 1967, and if you count both oil sands and conventional oil, Canada becomes second only to Saudi Arabia in oil reserves.

But that begs the question: if the world needs oil, and Canada has so much in these tar sands, why hasn’t this come up before? Why isn’t Canada already a petro-power on a par with the OPEC nations?

The answer’s pretty straightforward: economics. Environmentalists argue that extracting oil from the oil sands is an extremely “dirty” process, and that oil sands would produce a lot of greenhouse gases, and all that’s true. But the environmental concerns aren’t what’s kept tar sands from taking off in the marketplace. It’s the fact that the elaborate process for extracting crude from oil sands means they cost about 30 percent more to produce than conventional oil.

That tells you all you need to know about the economics of oil sands right there. When oil is commanding high prices, the sands are a viable option. When oil is cheap, nobody wants to bother. That’s why the oil sands world has a history of boom and bust. During 2008, when oil prices soared, then collapsed, the Alberta oil sands business saw boom and bust in only about a year.

And that’s where the economics of tar sands and the economics of renewable energy meet. Renewables like wind and solar are also more expensive than conventional forms of energy, which means their lure for investors plummets when prices are low—and they face boom-and-bust cycles as well. That’s one reason why renewables have done best in countries like Denmark where conventional electricity prices are habitually high.

Not surprisingly, a lot of the American political debate seems focused on making sure energy stays cheap right now, even though that undermines the prospects for nearly everything that might lead to more reliable, affordable, and cleaner energy in the future. Meanwhile, it’s actually a pretty safe bet that global energy prices are going up over the long run. World energy demand is going to grow so rapidly that the supply simply won’t be able keep up with it. The International Energy Agency has proclaimed that “the age of cheap oil is over,” which means that the more expensive alternatives are going to be more attractive – both renewables and unconventional forms of oil.

The real question, then, is which of these pricier alternatives we want to encourage?

Oil sands don’t require us to change our daily lives. We can keep driving the cars we use now, using the infrastructure we use now. We’ll just pay more for the privilege (and of course, live with the environmental consequences). It’s telling that the Chinese are also interested in Canadian tar sands, to the point where some analysts argue it doesn’t matter whether the Keystone pipeline is built or not. If Americans don’t consume the energy from the tar sands, the Chinese almost certainly will. China is looking at putting hundreds of millions of cars on the road in the next few decades, and they’ll take oil from anyone, anywhere.

And renewables? They’re getting cheaper to produce and more competitive with conventional energy, and that trend will probably continue. That has huge implications for how we generate electricity, and in fact, the U.S. government projects much of our new electricity capacity will come from renewables—a victory that environmentalists haven’t celebrated as much as you might expect. But we’re also faced with an aging electric grid that’s having trouble keeping up with current needs, much less supporting a major shift to renewable energy and electric cars.

In a world of high energy prices, it’s possible to end up in a world where we put tar sands fuel in our tanks and charge our iPods from wind and solar. In fact, it’s probable, and given the economic and budgetary stress the country is under, many would argue that it’s the more pragmatic and sensible choice. But if we want to choose this moment to put our bets on renewables (because tar sands are “dirty energy” and sooner or later will be depleted too), we’ve got to do more than protest. We need to be honest with the public about what it will take and get real about bringing the age of fossil fuels to a close.