There are many reasons to doubt a national economic strategy premised centrally on digging out non-renewable resources, then selling them off to foreigners as quickly as possible. But one of the most irrational aspects of the recent energy boom has been its perverse impact on export revenues.
In essence, the faster we extract bitumen and export it, the cheaper it gets. Our regulatory system gives each individual company free rein to export as much as possible, as fast as possible. But the resulting export surge drives down the overall price. Perversely, that undermines each producer’s revenue and fails to serve the public interest in maximizing the value of non-renewable resources.
Canada both exports oil (from the West) and imports it (to the East). However, because of the depressing effect of unrestrained exports on prices, an incredible gap has emerged between what we pay for imports and what we fetch for exports. Last December, that so-called “Canadian discount” surged to more than $60 a barrel. In essence, we had to export two barrels from the West to pay for each barrel imported to the East. The gap has since narrowed, but it still costs Canadians billions of dollars a year – hurting both oil companies and consumers. Almost half of Canada’s petroleum export revenue now goes to pay for petroleum imports.
The Canadian discount is commonly attributed to clogged southbound pipelines, but this is false. Export pipelines will continue to have capacity for a while, depending on how fast bitumen production grows. The problem is that the regional market those pipelines serve, in the U.S. Southwest, is saturated. Other oil, including new shale oil, has flooded that market, refineries are full-up and U.S. demand is sluggish, partly because of energy conservation measures.
Politicians at all levels now routinely invoke the Canadian discount as a scapegoat for all their fiscal ailments. Alberta Finance Minister Doug Horner singled out the price differential when he revealed a surprise $3-billion provincial deficit. Federal Finance Minister Jim Flaherty did the same, referencing the issue in explaining why his government is $5-billion behind its budget target.
This is unconvincing, especially at the federal level. Since Ottawa collects no oil royalties, any fiscal benefit from oil exports is indirect and modest, captured largely through corporate taxes from oil companies – taxes that Ottawa has cut in half since 2001. Indeed, Ottawa typically collects less than two cents from each dollar in upstream oil revenue.
The real cause of Canada’s deficits is the failure to stimulate employment and income growth across the economy. We can hardly single out one industry, petroleum extraction, which produces just 3 per cent of real GDP.
Indeed, these politicians have another motive for blaming deficits on oil price differentials: They support new export pipelines and hope their fiscal arguments will make those pipelines more palatable to a skeptical public.
But if the problem exists because we’re pumping out raw bitumen faster than markets can absorb it, will it really help to pump it out even faster? Few analysts believe the Keystone pipeline to the United States would solve the problem, even if it does get built; at best, it would displace downward price pressure from Oklahoma southward to Louisiana. Pipelines through British Columbia are unlikely to be built, for environmental reasons. And even if Canadian oil could reach Asia, remember that there are similar price risks there – including alternative supplies, conservation and environmental constraints. In sum, the inherent limitations of an economic strategy rooted in the extraction and export of raw resources cannot be overcome by simply finding another foreigner to sell to.
The sheer waste and irrationality of the Canadian discount should be addressed with alternative measures. Instead of extracting and exporting raw commodities, we should strive to add more value to our resources right here in Canada. Upstream, we could use far more Canadian-made equipment in resource projects. Downstream, we could upgrade and refine the resource instead of saturating export markets with raw output. Even better would be to use Canadian petroleum refined at home to displace the expensive crude currently imported from Britain and Algeria.
Yes, this would mean slowing the pace of bitumen expansion, since there’s not enough demand in Canada, to absorb all the new bitumen the industry wants to pump. But we would extract much more value from each barrel. And we’d stop cheapening the value of our own non-renewable resources with this mad rush to export.
Source: The Globe And Mail