Several weeks ago, the Canadian Federal Government made the controversial decision to pick up the Kinder Morgan Trans Mountain Expansion Pipeline. With a $4.5 billion price tag, Trudeau proclaims that it is in the national interest and will increase Canada’s oil prices. Of course, the decision is not without its critics: Trudeau is now under fire from the BC government, environmentalists, and First Nations tribes that had mutual agreements with Kinder Morgan.
The Kinder Morgan pipeline buyout brings to light some of the issues that the Canadian oil industry faces. As 99% of our oil product is exported, it’s certainly an industry that is sensitive to the international business environment. Read on for everything you need to know about the factors affecting the Canadian oil industry now.
Political factors can impact a company in three ways ways: domestic support, bilateral trade, and global conditions.
In terms of industry support, having a stable home government will make trade easier for Canadian oil companies. Trudeau has prioritized the provision of infrastructure that will allow trade with a greater variety of markets. However, the relationship with other governments plays a role as well. The market access to Asia partially enabled by the Trans-Mountain extension, will also depend on political agreements struck between Canada and Asia-Pacific nations.
The relationship with other governments plays a role as well. As steel tariffs negatively impact US oil producers, Canadian oil could become more highly demanded, thus resulting in a higher price. Overall, financial markets are betting that the imposition of Trump’s trade wars will negatively impact global economic growth – generally, this will drag down commodity prices such as oil.
“If the future of Canada’s energy sector is dependent on security of demand, then market diversification is imperative.” – Policy Options
Right now, 99% of Canada’s oil exports are purchased by the US. As are the laws of supply and demand, this stable agreement has reduced the purchase price to the point where Canadian companies are losing $15 billion per year in potential revenues.
Studies show that by diversifying Canada’s oil markets, companies could realize revenue gains of up to $15 billion with the same amount of product. The TME does just this, by providing the infrastructure to sell to Asia-Pacific markets, thus further ensuring future demand and allowing for a higher international price. In addition to increased revenue, the pipeline will also reduce costs: it is less than half the price to transport crude oil by pipeline than rail…although the $7.4 billion price tag must be considered.
From a domestic viewpoint, the pipeline supports the development of Alberta’s oil economy, by ensuring the industry’s prosperity and providing jobs for thousands. Plus, having additional capacity to ship this oil will help the current bottleneck situation that the Alberta industry is struggling with. However, it’s a large investment in an industry that may have an unstable future due to climate change and global pressures.
This year, Canada’s energy industry had the smallest investment in decades. It appears that climate change laws are hindering the industry from growing – which appears to be a positive for the environment. However, investment is crucial for the industry from both a profit and environmental standpoint, as it ensures the constant improvement of production processes. Such investments and innovations have allowed for a decrease of 35% emissions since 1990 in Canadian oil production. It can be argued that the improved infrastructure provided by the TME could spur foreign investment, and make that inevitable production at least cleaner than it currently is.
The production and use of oil is a global concern for climate and environment. Domestically, Canadians and natives are concerned about the risk of oil spills. Along with contaminating drinking water, this type of spill can impact tourism, farming, and port trade. The Canadian oil companies have adapted and begun to work with first nations in the last several years, showing a better recognition toward their community: however, the TME is arguably in violation of BC first nations’ mutual benefit agreement with Kinder Morgan.
On a global scale, oil is a non-renewable resource…and by continuing to support this industry, we continue to harm the planet we live in. Depending on the progress of renewable energy in the next several years or restrictive laws and climate agreements, oil could slowly lose relevance.
It will be interesting to see how the government handles the acquisition of the pipeline over the coming months, and the trade agreements that are struck in its presence. We’ll see if the Canadian industry returns to its status as a well-oiled machine.