A lack of market access for Canada’s crude oil is having a negative impact on the Canadian economy.
We asked Dr. Robert Mansell, Academic Director in the School of Public Policy and Professor of Economics at the University of Calgary, for his take on this important issue.
A: The Canadian oil and gas sector has been a key driver of the Canadian economy, especially over most of the last decade. Both regional and national economic performance is generally very significantly tied to the performance of the oil and gas sector.
It dominates all other sectors in terms of exports and net exports (the difference between exports and imports), both of which are the lifeblood of a small open economy such as Canada’s. Further, it has typically accounted for about one quarter of all non-residential investment in Canada, about half the value of shares traded on the TSX, approximately one quarter of total national wealth and it is one of the largest net contributors to government revenues.
A: The lack of adequate market access, particularly to the fast growing offshore markets, means large and growing negative impacts on both the oil and gas segments of the industry and this translates into significant negative implications for the economy.
For example, in the case of crude oil, it is estimated that current crude oil transportation constraints are resulting in an annual $20 billion to $30 billion loss of revenues for Canada. This in turn translates into lower growth rates for incomes and employment, higher unemployment and reduced abilities of governments to fund social services and public infrastructure without higher levels of taxation or debt.
A: In general, there are three main sources of gain associated with expanding our access to offshore oil (and gas) markets.
First, there is a gain in the form of reduced discounting of the prices received for Canadian exports. This discount increases when growing supplies are pushed into oversupplied North American markets. Having infrastructure that allows access to offshore markets would dramatically reduce the amount of such discounting applied to western Canadian oil.
For example, a reduction of this discounting by just $2 per barrel (on average) over a 30-year period translates into a direct gain of $115 billion in value added for Canada and almost $40 billion in revenues for provincial and federal governments.
Second, there is a diversification benefit in the form of greater revenue stability arising from the ability to have a broader and more diverse market portfolio. This benefit is particularly valuable in an uncertain and unpredictable global economy where not all markets move in sync.
Third, there is an important option value. For example, having infrastructure that would prevent the shutting in of production as a result of market dislocations has enormous value. For instance, shutting in 500,000 barrels per day of crude oil production for just one year would result in a revenue loss of almost $14 billion.
For more on this important topic, check out our blog post outlining how a lack of pipelines is costing Canadians.
The Canadian Energy Pipeline Association represents Canada’s transmission pipeline companies who operate approximately 110,000 kilometres of pipelines in Canada. In 2011, these energy highways moved approximately 1.2 billion barrels of liquid petroleum products and 5.3 trillion cubic feet of natural gas. Our members transport 97 per cent of Canada’s daily natural gas and onshore crude oil from producing regions to markets throughout North America.