Securing Canada’s energy future – Part 2

Canada's quest for security of demand

July 7, 2012

EDITOR’S NOTE: A recent study released by the Asia Pacific Foundation of Canada and the Canada West Foundation argues that Canada’s approach to energy should be more clearly based on its national interest, not a collection of private interests. It therefore calls for the establishment of a framework that will bring into play the interest of not only the private sector and federal and provincial governments, but also First Nations governments, communities and environmental interests. This backgrounder was written by Yuen Pau Woo, from the Asia Pacific Foundation of Canada and Roger Gibbins, with the Canada West Foundation.

The energy industry is vitally important to Canada’s current and future prosperity. In its 2010 Energy Overview, the Government of Canada attributed 6.7 per cent of our GDP and 23.2 per cent of export sales to the energy industry, which employs more than 350,000 Canadians.

In 2011, crude oil was Canada’s most valuable export commodity with sales of $50 billion. Government revenues generated from the industry – close to $22 billion in 2011 – provide indispensable support for the social programs Canadians value.

Oil and natural gas development will also play a role in generating government revenues well into the future. According to the Canadian Energy Research Institute, the GDP impact of the natural gas industry is expected to be $1.3 trillion over a 25 year period, while oil sands and conventional oil developments are expected to make a combined contribution of $3.2 trillion. In significant ways, therefore, Canada is an energy powerhouse, and our prospects for sustained economic growth depend very much on growing energy trade.

For an energy exporting country with abundant natural resources, our biggest challenge is security of international demand for our resources. This sets us apart from other G7 countries and emerging economies which are more concerned with security of supply.

Historically, Canadian total export trade has been concentrated in relatively few markets – first European, and then American. Over the past century the American market has become the destination of choice for most Canadian exports, with close to 75 per cent of Canada’s total 2010 exports going to the United States. Nowhere is our trade dependency on the United States more evident than with respect to energy, particularly oil and natural gas and electricity.

While Canadian coal exports have long gone to Asia, and Canadian firms have built effective supply chains in the region, the situation is dramatically different for oil and natural gas. As Figure 1 shows, Canada’s natural gas and crude oil exports go almost exclusively to the U.S., as do almost all hydro-power exports.

Not surprisingly, Canada’s energy commodity destination of choice, and up to now of necessity, is our closest neighbour. Despite the occasional storm that rocks the boat, Canada’s trade relationship with the U.S. has been amicable, resulting in an integrated North American energy system where Canada plays an important role in American energy security as its largest supplier of crude oil and natural gas.

This almost total reliance on a single customer for our oil and natural gas exports, albeit still the largest economy and energy consumer in the world, is not without risk to a trading economy. As the old cliche goes, when the American economy sneezes, Canada catches a cold.

Economic downturns in the U.S. reduce demand for Canadian products, including energy, and certainly the American economy has been sneezing a lot lately. More fundamentally, basic economics suggest you seldom maximize the value of what you are selling when there is only one buyer for your products.

The trade risks, however, go well beyond sporadic economic downturns and our demonstrated capacity to weather cyclical variation. American energy forecasts show flat demand over the next 25 years. The most recent projections of the U.S. Energy Information Administration, for example, predict little to no growth in oil and natural gas consumption (see Figure 2).

The picture grows even more discouraging for Canadian producers if we look beyond aggregate demand to projections for American imports. Not only is the American energy demand pie staying the same size, its share of the global pie is shrinking. Both crude oil and natural gas imports are expected to decline over the next two decades as demand is tempered and domestic supply increases (see Figure 3).

Unconventional gas and oil discoveries in the United States have increased the prospects for energy independence, and the Keystone XL pipeline dispute illustrates growing market access issues for Canadian producers.

Canada, therefore, is locked into a market that is slow growing, intensely competitive and fraught with political pressures. If the future of Canada’s energy sector is dependent on security of demand, then market diversification is imperative.

American markets will always remain an important part of Canada’s energy future. However, our traditional reliance on those markets will not provide adequate security in light of projected future declines in U.S. import demand for oil and natural gas, and public resistance to the importation of Canadian oil.

Without security of demand, the Canadian industry will not be able to make investment decisions for the long-term projects that create jobs and generate wealth. And, as discussed below, the Canadian oil and gas industry will continue to suffer from a price discount relative to world prices if it does not have the ability to sell into other markets.

The evidence above strongly suggests that growth in the Canadian energy economy will depend on market diversification – on finding growing international markets where Canadian security of supply is an asset.

The U.S. will remain a large, albeit slow growing market for Canadian energy firms, and for the foreseeable future it will continue to be our number one energy partner. The imperative for diversification comes from changing global realities; the primary opportunities for market diversification are to be found in Asia; the primary beneficiaries of that diversification are Canadians.

Yuen Pau Woo is the President and CEO of the Asia Pacific Foundation of Canada and Roger Gibbins is the President and CEO of the Canada West Foundation. To download a complete copy of their report click here.

This backgrounder is FREE to use on your websites or in your publications. However, Troy Media, the Asia Pacific Foundation of Canada and the Canada West Foundation, with links to their web sites, MUST be credited.

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