Smack in the middle of a $15-billion muddle.

• Author: Robinson, David
• Position: Economically Speaking

Albertans think Energy East will save their economy. Environmentalists see Energy East as a foolish investment in the wrong kind of energy technology. Many Northerners see the pipeline as a serious environmental threat. The premier of Alberta, Brad Wall, has promised to start shooting if Energy East doesn't go ahead. Wall is blocking Prime Minister Justin Trudeau's climate policy to get concessions for his province. Trudeau is looking for ways to keep everyone happy. A risky business deal has turned into a three-ring circus. What a muddle!

And Northern Ontario is smack in the middle of their muddle. Forty per cent of the pipeline is in Northern Ontario. That means that Northern Ontario communities will be taking something like 40 per cent of the environmental risk. So what should we think?

The answer involves the business case, national policy, and the environmental impact.

Starting with the business case, I wouldn't invest in Energy East. The odds are that it will be a big money loser. It is only profitable if East Coast refineries want to buy Alberta light crude oil and super refineries in India want a lot of the heavy oil.

Alberta crude has to be cheaper at the end of the 4,600-kilometre, $ 15.7-billion pipeline than oil from low-cost foreign producers. But tar sands oil is expensive oil. If energy prices stay low, the East Coast refineries will buy oil from overseas producers.

Pipelines are amazingly efficient. Energy East can get oil to the coast a dollar cheaper than tankers from the Middle East can. That is a tiny advantage. Some existing tarsands operations can cover their direct production costs as just under $23 a barrel. The bad news is that the marginal cost for Russia is only $18 per barrel, and for Saudi Arabia just $3 per barrel. Nigeria, the highest cost OPEC, comes in at just $32.

Twenty-three dollars a barrel is actually the shutdown price for tarsands plants. Even above that price, tarsands companies will take multi-billion dollar write-offs and never build another plant. To make a profit, the plants have to cover capital costs. Rystad Energy UCube in September 2015 put the break-even price for the tarsands at between $65 and $90.

So unless companies expect prices to stay permanently high--say, above $75 per barrel--existing tarsands plants may keep going, but there will be no new operations. Furthermore...