Varun Sivaram

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Are Oil Sands Better for the Environment than Offshore Drilling?

by Michael Levi
May 10, 2010

The Canadian Press reports that Canadian Environment Minister Jim Prentice is using the Deepwater Horizon debacle to make the case for the Alberta oil sands:

“I think it’s always been clear that the oil sands provide a safe, stable, secure supply of energy and they need to be developed in an environmentally responsible way. The risks associated with the oil sands, the environmental risks, are significantly different than, and probably less than the kind of risks associated with offshore drilling.” (Emphasis added.)

Is this true? Probably not. Here’s a back-of-the-envelope calculation that leads me to that conclusion.

Assume the damages from the Deepwater Horizon incident are $3 billion. Assume, further, that (a) this sort of incident is the primary source of damages from offshore drilling, and that (b) this sort of incident happens once every ten years. (The second assumption is probably very pessimistic.) This would yield average annual damages of $300 million. Double it to $600 million just to be careful.

What are the environmental damages associated with oil sands production? The impacts of greenhouse gas emissions are the easiest to quantify. Oil sands production yields about 0.1 extra tons of carbon dioxide per barrel produced compared to the average barrel of oil consumed in the United States. Production was about 1.3 million barrels per day (mbd) in 2008 (slightly less than total U.S. offshore production) and rising. That results in an extra 47.5 million tons of CO2 emissions annually. The EPA is currently assigning a “social cost” of $21 to each ton of CO2 emitted. (Some environmentalists have protested that that number is too low.) That implies extra annual damages of about $1 billion – almost twice the (very pessimistic) estimate of the local environmental impacts from offshore drilling accidents like Deepwater Horizon. The margin would grow if one were to include the hard-to-quantify local impacts of oil sands development on water, forests, and local health. (I would appreciate pointers from readers to any studies that do a good job of quantifying those impacts.) It would also grow if climate damages turned out to be greater than $21 per ton. (I should add another caveat: the environmental impacts from offshore oil accidents accrue primarily to the local environment, while the climate damages from oil sands production fall largely on the rest of the world.)

This doesn’t mean that prudent oil sands development is unwise. I have argued just the opposite at some length – a position I still hold despite having taken significant flak for it from some friends in the environmental community. From a parochial U.S. perspective, the energy security benefits of oil sands development probably outweigh the climate damages in the immediate future. From a Canadian perspective, the economic value of oil sands production – about $10 billion annually even if the profit from each barrel produced is only $20 – is almost certainly higher than the local environmental damages (so long as a decent fraction of the proceeds are captured for local benefit). But the environmental costs are real and significant, and the current incident in the Gulf of Mexico should not be used to downplay them.

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  • Posted by abarrelfull

    Within the scope of a cap & trade system, or a pigou tax that reflects the cost of CO2 emissions, the climate damage done by Tar Sands becomes unimportant. Someone somewhere will decrease their emissions to create a balance.

    The damage done by oil spills is different. An area of coast badly effected may take decades to recover. There is no way this can be mitigated by someone spilling less oil elsewhere.

    I find the local impact of Tar Sands development more worrying.

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