A new paper from the Macdonald-Laurier Institute reveals that, contrary to common assumptions, the greatest value added to Canada's crude oil resources lies in petroleum extraction and transportation, and not refining it into gasoline and other products. Nor would refining more gas in Canada give consumers a break at the pumps.
OTTAWA, Oct. 3, 2013 - Why doesn't Canada refine more of its oil in this country? Aren't we missing out on "adding value" to our exports of crude? It's not that simple, finds MLI Senior Fellow Philip Cross in a commentary paper released today by the Macdonald-Laurier Institute.
"The appearance of a discount for bitumen prices early in 2013 elicited widespread calls for processing more petroleum products in Canada," writes Cross. "These calls were based on a widely-shared assumption among analysts that Canada should extract more value-added by manufacturing its natural resources rather than exporting raw materials."
But Cross's commentary "Extracting the most value from Canada's petroleum" (click for the full report) clearly demonstrates the limitations of that argument for additional petroleum refining in Canada. More value lies in petroleum extraction and its transportation, not in its manufacture.
"This is partly because only a few countries, like Canada, are blessed with ample oil supplies," writes Cross. A large and growing number of countries compete in the business of refining oil. Despite this competition, some refineries in Canada remain profitable and continue to invest in their future. Still, for many refineries, upgrades that would allow them to process oil sands crude would be prohibitively expensive, requiring billions of dollars in manufacturing hardware. Much of the type of crude that the oilsands produce will still have to be exported to refineries with excess capacity in the U.S. or overseas.
And given that regional variations in gas price have more to do with taxation levels, new supply of Western crude to Eastern refineries would help improve low profit margins for refiners, but would do little to lower the price of a fill-up for consumers.
The efficiency of transporting petroleum proved to be the solution to the discount for bitumen prices. Through innovative solutions in rail and marine transport, the discount was eliminated, at least for now, even before major new pipeline capacity was added, the report notes.
Philip Cross is a Senior Fellow at the Macdonald-Laurier Institute. Prior to joining MLI, Mr. Cross spent 36 years at Statistics Canada specializing in macroeconomics. He was appointed Chief Economic Analyst in 2008. He is a frequent commentator on the economy and interpreter of Statistics Canada reports for the media and general public.
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