Unintended Consequences of Trade Agreements

The North American Free Trade Agreement (NAFTA) is generally viewed as making a positive contribution to the Canadian economy. With a relatively small population our standard of living most certainly would not be what it is without the benefits of excellent trading relations with the US.

Prior to the 1980s, western Canadian crude was shipped by pipeline to Ontario and Quebec where it met most of crude oil demand in these provinces. Canadians musing about why we are not using our oil resources to meet all of Canada's needs first may be unaware of the unique clauses in NAFTA that basically shifted the West to East flow of energy resources across Canada to a North-South flow into the US market.

The Proportionality Clause in NAFTA

The energy export provisions in NAFTA have encouraged the development of the tar sands and the rapid growth in the export of energy (notably crude oil and natural gas) to the United States. NAFTA is why Canada is the number one supplier of oil to the US and one could go further and say that the expansion of the oil sands has been (until lately) due to US demand.

The proportionality clause - the only one of its kind in all the world's trade agreements - requires Canada to make two-thirds of its domestic oil production available for export to the U.S., even if Canadians experience shortages. It kind of makes one think about that phrase "With friends like this...." It hasn’t dawned on most Canadians that their governments have signed away their right to have first access to their own energy supplies. For some inconcievable reason Canada is also the only member of the International Energy Agency (IEA) that does not keep a ninety day emergency supply of oil on hand.

A decade before NAFTA, Canada had a National Energy Policy that limited exports to the U.S. and a Foreign Investment Review Agency, which tried to reduce U.S. direct investment in Canada (including the energy sector).

Until recently, Canadian oil producers (unlike their brothers in the softwood lumber industry) have not had a problem with NAFTA. Unanticipated events like: US oil consumption dropping, new Bakken shale oil on the market and refinery shutdowns causing a glut of supply of crude oil in Cushing Oklahoma, where most of Alberta oil goes have changed everything. Now, Canadian oil producers have a problem. The price for raw bitumen is low. There has been rapid expansion of oil sands production. Suddenly having only one customer for Canadian crude isn't working out so well.

The low prices for bitumen in the US Midwest is a short term problem. Oil sands production is so expensive, that even a short term drop in price is problematic. Meanwhile, Canadian oil producers see a ready market for their product, at a better price, in Asia.

As the Canadian supply of bitumen to Asia increases, the proportionality clause may come into play. It may be argued that the reason for the rapid expansion of oil sands production (which Canadians concerned about the environment are raging against) is to maintain US supply according to NAFTA and meet demand in China. Canadian reserves are sufficiently large to keep Canada the main source for U.S. oil imports for years to come.

China's investment in the Canadian oil sands presents a new factor in Canada-U.S. relations.The era of oil diplomacy has come to Canada.

While I suspect the Government of Canada has been well aware of the delicacy of this situation, it is obvious that once again, they have not given due consideration to the rest of Canada who do not want their wilderness and the livelihood and culture of their First Nations to be sacrificed to satisfy Big Oil's need for continued growth and profits.

The situation is as bleak and sticky as that gooey black tar that is the source of it all.

The Big Oil Picture - One Puzzle Piece at a Time

When I was an undergrad one of my favourite ways to decompress was to do a jigsaw puzzle. I bought a new one each term and there it would sit until I needed the distraction. (ok, sometimes it was a major way to procrastinate too!) It has recently dawned on me that the entire oil market is one huge puzzle with most of us focused on just a few pieces: the price we pay at the pump, easy access and maybe, the pollution we cause when we burn it. Depending on your outlook, you may also be concerned about various foreign wars/interventions in oil producing areas.

With each passing decade more of the world increasingly functions on the use of gasoline and diesel. The amount of conventional oil in the Middle East far outstrips what is available anywhere else on the Earth.We don’t know exactly how much oil there is in the Middle East because they are not transparent about anything. Conventional oil flows through a well without stimulation and through a pipeline without processing or dilution. It’s a relatively cheap process.

Global oil production appears to have leveled off. Our economies are based on continued access to cheap oil. There is not enough cheap conventional oil to go around these days.

World demand for oil continues to grow. China is experiencing a large-scale transition away from bicycles and mass transit toward private automobiles.So desperate has our need for oil become, and so willing are we to pay the necessary high price, we are now producing more and more oil from the difficult spots like the deep waters in the Gulf of Mexico, Alberta’s oil sands and shale oil deposits. The oil sands are a thick, viscous mixture of bitumen hydrocarbons combined with water, sand, heavy metals and clay. Not only is this a very expensive way to fill our tanks, it has opened a Pandora’s Box of associated hazards to our natural world and populations that depend on the largess of that natural world. We have a problem.

 China also needs to provide lots of jobs to its citizens. Not interested in just importing ready to use oil and gas China wants to do the upgrading and refining within its’ borders. This means the bulk of the jobs, and the profits from oil production will go to the Chinese. The international corporations who are gaming the oil and gas sector have no particular loyalty to any nation, other than the nation of shareholders and executives they represent.

The Keystone XL and Northern Gateway Pipeline applications are providing an opportunity for Canadians to decide how best to deal with the land locked resource we have.

Regardless of how the Harper government tries to dominate and (re?)direct the oil conversation Canadians will collaborate like no other time in history to have a say in this new oil dilemma. We all want to build the puzzle together. What remains to be seen is how responsive our business and political leaders will be to this new era of engagement.