E Canada Is Unable To Participate In The Recent Surge In Oil Prices

Possessing the third largest oil reserves in the world and being the fifth largest oil producer, Canada should benefit handsomely from the recent run up in oil prices. However, Canadian oil is heavily discounted, selling at US$53 /bbl compared to the benchmark Brent ($80), OPEC ($75) and U.S. shale ($72). More importantly, while heavy oil has always traded at a substantial discount, it appears that the same factors that have negatively affected oil sands are also contributing to the discount for light Canadian oil.

Canada has only one major market into which to sell its oil, the United States where non-conventional shale oil production continues to expand. The United States simple requires less and less of Canadian production, even at these discounted prices. American refineries are virtually operating at full capacity  just to accommodate U.S. crude oil production.

Even if the United States were to require more Canadian oil, pipeline capacity constraints will not allow a greater flow across the border. Delays continue to plague major proposed oil pipelines from Western Canada, including Kinder Morgan's Trans Mountain expansion, Enbridge's Line 3 replacement, and TransCanada's Keystone XL. Frustration levels has reached such point that Alberta just passed legislation to cut off oil and gasoline shipments to British Columbia in an effort to force that province to permit the construction of the Trans Mountain expansion. This dispute does not seem to have an end in sight.

In the past when oil prices advanced, Canada could count on foreign investment to step and boost not only the oil patch but also the country as a whole. However, this time around we do not see any spurt in foreign investment, perhaps because of the range of uncertainties surrounding U.S. trade policy and NAFTA negotiations. Foreign investors need clarity on their investment outlook which is sorely lacking at this time.

Meanwhile, in other regions of Canada higher gasoline prices can be considered deflationary. That is, the eastern provinces which rely on imported oil have to pay more at the pump. This leaves fewer dollars available to purchase non-energy goods and services. Ultimately, domestic demand weakens and the overall merchandise trade account goes further into the red dragging down national income.

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Moon Kil Woong 8 months ago Contributor's comment

Canada benefits, it just can't increase its sales right now. The issue is processing. New refineries are being geared to US oil production rather than overseas oil mixes. Canada should look to Europe or Asia to sell as well. That said, they need close partners to build out processing infrastructure there.

Gary Anderson 8 months ago Contributor's comment

Slowdown in investment coukd be recessionary.

Norman Mogil 8 months ago Author's comment

Investment never recovered fully from the double hit of the financial crisis of 08 and the collapse of oil prices in 014. The entire trajectory of growth fundamentally shifted down.