You know things are bad when private-sector companies like Cenovus Energy are begging NDP Premier Rachel Notely to use the powers of government to curtail oil production in Alberta.
But the gruesome truth is, at US$14 per barrel, Western Canadian Select (WCS) is essentially a giveaway. This is bad for business (with the exception of U.S. oil refining interests) and tragic for the government and people of Alberta, whose precious non-renewable resources and associated royalties are being flushed down the drain.
But Energy East could be our salvation.
Let’s face it, Mr. Market has not been kind to Canadian crude oil. After decades of continental integration in the energy sector, 97 per cent of all Western Canadian crude exports go to one county – the United States.
Regrettably, the captive pipeline system that carries Canadian crude to markets has been structured to oversupply, which means our crude is consistently priced at a discount. Today, that discount stands at over US$40 per barrel.
We Canadians have been played and played badly. But this tragic situation could, ironically, be a moment of great opportunity – if our politicians had the nerve to do something really creative.
There’s a perfect storm building around three hot-button political issues:
- the big oil ripoff;
- the problem of associating with brutal Organization of Petroleum Exporting Countries (OPEC) members (like Saudi Arabia, Iran and Venezuela);
- and the need to send a message to the U.S. that – after the overt intimidation employed in trade deal negotiations – we’re not going to submit to an abusive trade relationship any longer.
All three problems could be solved at once, with a renewed and somewhat revised commitment to the Energy East pipeline.
What would this solution look like and how would Canadians solve the big problem of the price of oil?
Let’s assume that the federal government had a strategy for energy that includes the lofty goal of national energy self-sufficiency. And let’s further assume that the government commands the political will necessary to realize the goal of displacing imports of OPEC crude with domestic sources.
According to Natural Resources Canada, Canadians (principally Ontario and points east) import up to 35 per cent of total domestic crude oil consumption. In fact, Canadians import large amounts of crude, at world prices (about 10 per cent higher than West Texas Intermediate or WTI), from a variety of nefarious regimes including Saudi Arabia.
Let’s further assume that upgrading the Energy East pipeline and building other supporting infrastructure, including upgrading facilities, additional pipeline and refining capacity, could accomplish the task of displacing crude imports.
This single act would establish an alternative market for Western Canadian crude, while providing options for Canadian producers that don’t involve shipping raw bitumen through environmentally-sensitive West Coast shipping lanes.
How does the government determine the price at which Canadian crude would trade?
Here, there’s a obvious solution: simply introduce legislation that crude marketed and sold in Canada would be at the WTI price, which is essentially the domestic price for U.S. crude oil.
This would mean (roughly) a 10 per cent discount for Canadian refiners presently importing OPEC crude at much higher (Brent) prices and instantly provide a solution to Western Canadian producers and governments suffering from a market-induced bargain-basement pricing regime.
The national mission to achieve energy self-sufficiency could be as important to Canada as the original National Dream, the building of the Canadian Pacific Railway a century and a half ago. Not only could it unite Canadians in a broad exercise of nation building, it would send a clear message to the United States that Canadians are taking control of their destiny.
A number of established myths would have to be overcome in order to accomplish this ambitious mission, including overthrowing the idea that governments have no place meddling in markets. Clearly, Mr. Market would not like to have its authority challenged.
Secondly, we Canadians would have to overcome a national obsession with simply being a producer of raw materials for the United States market. This fact is most obvious in energy but is increasingly true in forestry, other agricultural sectors and even in advanced technology. All of these products are being reduced to the lowest denominator by market forces and national neglect.
Do Canadians have the gumption to stand up and launch a new national policy built around enhancing our great nation?
Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.
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