First of all, lets get an idea of the scale of price increases the tar sands have seen:
Bob Gillon, an energy analyst with John S Herold in Connecticut, said the Athabasca expansion would now cost six times what the original project did, on a daily flowing barrel basis.
"It's not a knock on Shell or this project, everybody's facing it," Gillon said in an interview Thursday.
"But my Lord in heaven. If you're talking about something that cost you six times as much as it did six or eight years ago, even with the move we've had in oil prices, we're getting these things back to where the economics . . . are going to get skinny in a hurry."
Much of this increase is due to the massive energy inputs required to make oil sands in the first place. The main input for oil sands is water (cheap) and natural gas (expensive.) There was a brief window, roughly 2000-2004 where oil prices were increasing but North American natural gas was plentiful and cheap, and it looked like the tar sands were, oh, let's call it a Bottomless Well. (That tract, which I'll confess I haven't read, was featured on the Daily Show, and my thought watching the guy talk was that he must have taken money from the GOP. A more positive review at Futurepundit makes me reconsider my views.) The other big increase in costs probably comes from labour, which is in increasingly short supply in Alberta generally, and Fort McMurray (the tar sands boomtown) specifically.
But now we're at the point where North American NG production is past peak, and the tar sands are rapidly going to be faced with a problem: how to generate the massive amounts of heat that are required to coax the bitumen out of the gluey sand in Athabasca.
The most obvious option - given the need for high levels of heat, and the sensitivity towards CO2 and other emissions - is nuclear. The problem is that Alberta's outgoing-but-still-in-charge Premier, Ralph Klein, has essentially said that Alberta will stay nuclear-free until he leaves. This would almost make me cheer Klein for the first time in my life, except he's suggested coal-fired tar sands refineries. The mind boggles.
Whatever the oil companies eventually decide on - and I wouldn't count nuclear out - the point remains that with the decline in light, sweet crude production, and the probably-impending decline in all conventional crude production, we're faced with a liquid fuels shortage. (The potential for a North American natural gas shortage is also very real, but that's another subject.) This liquid fuels shortage is compounded by the fact that all the synthetic alternatives, whether tar-sands, coal-derived fuels, or ethanol, all are currently* very energy-intensive to produce.
This is problematic enough when energy prices are low, because you're largely burning cheap, clean, efficient natural gas to make dirty, expensive, wasteful gasoline (or an additive.) This is even more problematic when the primary energy prices are high, because the profitability of tar sands basically disappears (or nearly so) when natural gas prices go up. Then the options become either a) find new cheap sources of energy inputs, or b) look for subsidies. We've already seen the search for A, and given the results of the recent elections here in Canada, I wouldn't bet against B, either. (Our newest Prime Minister is a western Conservative, and about as principled as any Republican. He's also desperate to make nice with Dubya. I'm sure his objection to big-government won't stop him from funelling money to the tar sands.)
People who've advocated against the idea of Peak Oil have usually pointed to one of two possible saviors: Undiscovered conventional oil (which looks increasingly less likely) or unconventional oil deposits like the tar sands, or even oil shale. The problem with all of the unconventional sources is that a) as we've seen, they're very energy-intensive, and b) they generally produce much smaller volumes of oil per day per dollar invested. This means that even if the energy-intensity weren't a problem, it would be much, much, much more expensive to replace the world's 85 million barrel a day habit with tar sands, shale, or anything else.
Even if you don't buy that Peak Oil is imminent - and I admit, somedays I waver - I think anyone can see the idea that we've got a future of cheap energy supplies ahead of us is fraudulent. That's not to say energy use won't be affordable (I believe efficiency and lifestyle changes will reduce people costs dramatically) but that the sources won't be as cheap as we've known for the previous century.
*Yes, currently. I've read about some impressive-sounding improvements in ethanol production, and even some companies advertising massive improvements in efficiency for tar sands production. The problem is that the existing infrastructure is built around the old, inefficient methods, and is likely to remain so for the forseeable future. This only convinces me further that the solution will be in demand reduction, not supply increases.