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By Grant Aldonas
The Obama administration’s decision to delay approval of the Keystone XL pipeline has caused Canadian ministers to reassess US-Canadian trade and energy ties. At the APEC leaders meeting in Honolulu in late November, Prime Minister Harper said the decision underscored the need for Canada to look to its own interests and ensure that its energy resources reached energy hungry markets in Asia
The Canadian leader's frustration with the Obama administration is both understandable and justified. So, too, is the Prime Minister's determination to open new markets for Canadian energy and other goods and services in the most economically dynamic region in the world today.
It is also true that asserting Canada's independence is often necessary in its relations with its neighbour to the south simply to get the current administration to take notice. Given that Canada's economy is one-tenth the size of that of the United States, Canadian interests can suffer. Witness the difficulties both US and Canadian businesses have faced in moving goods across the border after the events of 9/11 and the more recent clash over US Buy American requirements.
Having said that, it is also important to keep the Keystone conflict in context. While incredulity and resentment are natural responses to the Obama administration's decision (and many Americans would share that perspective), no one should be surprised that US domestic politics would trump economics against the backdrop of nine per cent unemployment in the United States and the President's falling poll numbers.
More importantly, recrimination or retaliation against the current US administration does not represent a credible policy that serves Canada's long-term interests in developing the oil sands and strengthening energy ties with the United States.
Here's why. Houston alone represents nearly a fifth of all North American refining capacity and holds a near monopoly on capacity capable of refining the product of Canadian oil sands. The route south offers the most efficient and cost effective way to bring Canada's petroleum to North American and world markets. Equally, while it is always useful to have an alternative customer to keep the bargaining honest, the reality is that there is no similar refining capacity in Asia that can currently handle what Alberta produces.
Growth in refining capacity already lags demand. Rising refining costs due to capacity constraints imply a lower rate of return on Canadian oil. Gaining access to refining capacity sooner rather than later means that Canadian production will be less at risk from tightening markets as the decade moves on.
Add to that the fact that the economics of Keystone and the oil sands work now, but that may well prove less true in the not-too-distant future. It is true that energy demand will continue to rise globally, despite the recent downturn due to the financial crisis and the ensuing global recession. That does not necessarily translate into an advantage for Canadian oil sands.
In the absence of Keystone or an alternative route pipeline, Alberta's oil already sells at a significant discount due to transport costs. Those costs will make the oil sands less profitable at a minimum, but could, with flat or falling energy prices following increased local supplies in the United States, make the full development of Alberta's resources commercially unviable.
More profoundly, there is a revolution under way in the energy sector globally. That revolution has nothing to do with the much-touted "green" economy that even massive US subsidies have failed to stimulate. It has everything to do with the price of oil and gas and the increasing ability of major energy producers to tap resources that were previously unreachable, either for technological or economic reasons. Whether it be shale gas or increased oil production by virtue of some of the same technologies that have brought the Marcellus formation into production, the next big energy play for the international oil companies lies in North America, particularly the United States.
That has obvious implications for Canadian economic interests. It implies a larger pool of lower cost energy in local markets where Alberta's oil sands principally compete. It also implies downward pressure on global energy prices because of the lower risk of supply disruptions due to Middle Eastern politics or changes of government or energy policies in a number of oil producing states. Seen in that light, Canada's best option still lies in a pipeline headed south to Houston.
The shift in energy production back toward North American also holds significant political implications for building a stronger constituency for the pipeline in the United States. The shift weakens the energy security arguments on which Canada has traditionally relied to make its case for the development of the oil sands and the pipeline south. Those arguments lose their potency when the United States is poised to regain the top spot in global energy production.
To secure US approval of the pipeline project, even after the 2012 elections, will involve a fight. The opponents are now well organized and entrenched. Succeeding the face of that opposition will require building a significantly stronger US constituency in support of the project going forward.
The key to building that constituency, of course, is to demonstrate the project's impact on the US economy, not just in terms of broad estimates, but also in terms of its impact on firms and workers at the local level in communities across the United States. The goal of that effort must be to mobilize the communities most affected by the President's decision to bring their message home to state and local officials and to their representatives in Washington, DC.
The most useful tool that the promoters of the Keystone project have in building the constituency they need may prove to be a map of the supply chain that serves both the development of the oil sands and the construction of the pipeline. What the map will reveal is the number of companies, workers, and communities affected by the President's decision in political terms that even the White House will understand.
The supply chain map will also illustrate how closely integrated the US and Canadian manufacturing sectors have become and why it is both smart economic policy and good politics, both in the United States and Canada, to take the interests of our manufacturing sector into account when the decision on the Keystone pipeline is once again on the President's desk. Truly an instance when one picture would be worth a thousand words.
