Next time you hear someone claim we can do without the B.C. pipeline expansion, don't be swayed. Without crude oil exports, Canada simply cannot pay the rent.
As British Columbia political parties jockey for position after the tight provincial election results, it will be tempting for them to turn the Trans Mountain Pipeline Expansion project into a bargaining chip and propaganda tool.
For the good of Canada, we have a simple message to them: you and all Canadians will pay a high price later if you undermine the nation's fiscal sustainability with intransigent positions on the pipeline. The reason is simple: crude oil is what pays the rent in Canada, a point vividly made in the accompanying chart.
Remove crude exports from this picture and consider the resulting economic chaos: we currently have no alternative way to pay for the machinery, electronic equipment, and diverse other goods that Canadians depend on for their health and everyday existence.
At Resource Works, our Advisory Council met recently to hear from renowned bank economist Patricia Mohr. With dispassionate ease, this career-long practitioner laid down some basic resource economics that opened many eyes to the gravity of the current situation, and what the loss of a golden opportunity means for us as Canadians:
- WE ARE A TRADING NATION: The fact is that Canada owes its economic prosperity to trade – we are a trading nation – and crude oil dominates.
- EVEN WHEN IT'S WEAK, OIL IS STRONG: Even at the bottom of the oil price correction last year, crude oil generated by far the largest merchandise trade surplus for Canada at $32 bn; $70 bn at the top of the price cycle in 2014.
- EVERY CANADIAN GAINS: Strong oil export revenue has much to do with the ability of governments to fund social services across Canada. Canada’s oil reserves are the third largest in the world – a huge source of wealth for all.
- WE'RE GETTING SHORTCHANGED: It is commercially risky to rely largely on one key export market – the United States. The need to build greater oil export capability to the B.C. Coast has as much to do with garnering competitive international prices, as it has with the need to grow export volumes and tap the faster growing markets of Asia-Pacific (including India).
- THERE IS A SOLUTION: Western Canada’s crude oil (both light & heavy) trades off WTI oil prices. U.S. refinery outages or seasonally slower demand often widen the discounts endured by Canadian producers. An alternative export outlet to Asia-Pacific would allow producers to divert volumes to other markets, boosting prices by stepping up international competition for Canadian oil.
- ASIA HAS A BIG FUTURE: Equally important, heavy oil prices in China and Singapore could be significantly higher than in the U.S. Midwest or Houston area. In Oct 2015, Basrah Heavy from Iraq sold in China & Singapore at a price discount off light oil that was half the level for Western Canadian Select heavy in the USA, at a time when the light crude marker Oman/Dubai traded at the same price as WTI. Basrah Heavy, similar in quality to WCS heavy, was introduced to world markets as a new crude in 2015, and partly accounts for a huge surge in Iraqi production since 2014, much of it bound for China & the rest of Asia.
- THE OPPORTUNITY BECKONS: There is little doubt that refineries in China and India would welcome Canadian crude. Tanker costs in an Aframax vessel (100,000 DWT) from Vancouver to Asian markets have been less than US$4 a barrel.
Ms. Mohr's conclusion was that oil pipeline capacity to the B.C. and Atlantic coasts is vital for the national economy. Or, as she put it, crude oil is "what pays the rent in Canada". The chart above is based on her research. It shows Canada's merchandise trade balance by product for the three most recent years. Can you imagine Canadian prosperity without the contribution of crude oil?