The public debate surrounding Enbridge’s proposed Northern Gateway oil pipeline has suddenly veered off in a new direction, powered by economic nationalists and the suggestion that rather than exporting oil to China, we should be refining it here at home.
The latest entry in this unfolding discussion comes courtesy of the Alberta Federation of Labour, which earlier this month released a report by BC economist Robyn Allan claiming the Northern Gateway project will damage the Canadian economy and hurt consumers because it will lead to markedly higher gasoline and other fuel prices.
But a critical look at economic data convincingly shows that Allan’s assumptions pertaining to the impact of Northern Gateway on domestic crude oil prices are unrealistic and therefore, her claims and conclusions are essentially meaningless.
To begin with, Allan mistakenly assumes that exporting 525,000 barrels of crude oil and bitumen (both raw and upgraded) per day via the Northern Gateway pipeline (as Enbridge is proposing) would increase the price of every barrel of oil produced in Canada by $2 to $3 per barrel over a 30-year period.
The United States currently absorbs virtually all of Canada’s crude oil exports and Enbridge suggest that, based on current and anticipated differentials between crude oil prices in Asia and the U.S., netbacks to Alberta could be $2 to $3 per barrel greater on oil marketed in China. But there is no guarantee that the existing price differentials will be maintained. In fact, they almost certainly will not be.
The high crude oil prices in Asia, where oil demand is growing more rapidly than in most other parts of the world, will undoubtedly attract incremental supplies from Canada, the Middle East and other world regions until world regional oil price differentials mainly reflect transportation costs from one region to the next.
Further, the Northern Gateway Project will facilitate the shipment of a relatively small portion of Canada’s conventional crude oil and bitumen production to the Asia Pacific. According to the National Energy Board’s most recent projections, at full capacity the Northern Gateway oil pipeline will only be capable of transporting 17 per cent of Canadian oil production in 2020. With further growth in production (mainly from the oil sands), the percentage of Canadian oil shipped to Asia via Northern Gateway will slip to under 10 per cent.
This means that, even in the unlikely circumstance that producers will be able to realize a $2 to $3 per barrel higher netback on oil shipped to Asian markets, the lion’s share of Canada’s oil exports will continue to be transported to U.S. refineries where the netbacks to Alberta will typically be based on the West Texas Intermediate oil price marker.
To argue that once the Northern Gateway oil pipeline is operational, every barrel of oil produced in Canada will cost Canadian refiners from $2 to $3 more, and that this will push up fuel prices and accelerate inflation, makes no sense.
The National Energy Board predicts further oil sands development will increase Canadian oil production by 3.3 million barrels per day from 2010 to 2035. But rather than driving up oil prices, this will help keep world oil prices from increasing as much as they might otherwise. The International Energy Agency’s 2011 World Energy Outlook predicts that world oil demand will increase to 99 million barrels per day by 2035 from 87 million barrels per day in 2010. Increased oil supplies to meet those additional needs must come from somewhere. If oil sands production growth is constrained and the shortfall is not made up by increased production from other parts of the world, the world oil price will inevitably increase beyond the levels the IEA suggests.
Since Canadian oil requirements are not anticipated to increase much in coming years, apart from possible replacement of the relatively small supplies currently being imported, virtually all of our incremental production will be available for export. But the most recent long-term projections by the U.S. Energy Information Administration indicate that U.S. oil import requirements are likely to diminish in coming years as domestic production of crude oil and equivalent products grows and demand for transportation fuels decreases. This underscores the need for Canada to seek out and develop new markets.
Contrary to what Ms. Allan and the Alberta Federation of Labour would have us believe, shipping a portion of the anticipated increase in Canada’s oil production to markets in the Asia Pacific will put neither Canadian consumers nor the Canadian economy at risk.