Brian Lee CrowleyCanada has wasted too much of its energy vainly trying to get American politicians to approve Keystone XL. Now, writes Brian Lee Crowley in the Ottawa Citizen, we’re paying the price for failing to build the infrastructure we need to diversify our energy export markets.

By Brian Lee Crowley, Sept. 25, 2015

Hillary Clinton’s bizarre and nonsensical rationale for pledging to veto the Keystone XL pipeline should she become president has produced the usual spate of Canadian handwringing. Editorialists, energy companies and politicians have rightly ridiculed her blatant pandering to the same parts of the Democratic base that have motivated President Barack Obama to keep the project dangling on a string for years.

The US State Department has repeatedly found the pipeline does not increase greenhouse gas (GHG) emissions. Moreover refusing to build Keystone won’t stop the oil; it will merely divert it to rail which is costlier and statistically less safe than a well-designed and regulated pipeline.

Yet Hilary’s argument is that the Keystone debate has become a “distraction” in the climate change debate. Her conclusion? She must therefore oppose it. I personally think that if the pipeline increases America’s oil supply from a safe and stable ally without increasing GHG emissions while improving relations with the republic’s closest friend and trading partner, the way to remove the distraction is to approve Keystone and move on. Not so in America’s fevered politics.

Canadians, however, should not be too smug as they deplore the Byzantine manoeuvering of American politicians on the pipeline file. In typical Canuck fashion, for decades we relied on easy money from the American market and declined to take the steps necessary to diversify markets for our energy. The predictable result was that when circumstances in the US market turned against us we were caught short. Our self-inflicted desperation has been a gift to the more extreme elements in the environmental movement, who quickly grasped that lack of pipeline capacity to diverse markets is the Canadian industry’s Achilles’ heel.

Of course everybody in the energy industry and government finance departments is fixated at the moment on the consequence of our inability to move Canadian oil beyond its traditional market in the US Midwest, namely that our oil now fetches a heavily discounted price there. Today, for example, a world benchmark crude like West Texas Intermediate sells for about US$46 a barrel. Western Canada Select goes for $32.

What might explain such a difference for an internationally traded commodity with a well-established world price? One reason among many, but one that matters a lot, is we cannot get our crude to international markets. The existing pipeline network puts Chicago and other markets in America’s heartland in easy reach, but not Japan or Europe or China.

That used to be fine by us when we were paying low transport costs to get our undiscounted oil to the nearby Midwest.  

Then the non-conventional oil revolution happened and suddenly America was awash in oil, much of it in places like North Dakota, that are closer to Chicago than Alberta is. Discounted prices are the result and the only cure is more pipelines to other markets. But we didn’t worry about putting all our eggs in the US basket when times were good, and now we are paying the price.

In round terms we export three million barrels of oil a day to the US. A $14 per barrel discount means every day $42 million of value is transferred from Canadian producers to others in a complex value chain, including to our neighbours to the south. Increased pipeline capacity mightn’t eliminate the discount, but would reduce it significantly.

We don’t think enough about these facts when trying to understand what may otherwise appear to be bizarre behaviour by American politicians on Keystone. After all, they have us literally over a barrel. The pipeline status quo creates profitable opportunities for American oil companies in the Midwest by forcing Canada to supply its crude at bargain basement prices. Why would they volunteer to give that up?

The real challenge for us is not to understand Americans’ behaviour, but our own failure to manage this obvious vulnerability when circumstances were more favourable. We are paying a high price for our complacency.

Brian Lee Crowley (twitter.com/brianleecrowley) is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.