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There are many reasons to doubt a national economic strategy premised centrally on digging out non-renewable resources, then selling them off to foreigners as quickly as possible. But one of the most irrational aspects of the recent energy boom has been its perverse impact on export revenues.
In essence, the faster we extract bitumen and export it, the cheaper it gets. Our regulatory system gives each individual company free rein to export as much as possible, as fast as possible. But the resulting export surge drives down the overall price. Perversely, that undermines each producer’s revenue and fails to serve the public interest in maximizing the value of non-renewable resources.
Canada both exports oil (from the West) and imports it (to the East). However, because of the depressing effect of unrestrained exports on prices, an incredible gap has emerged between what we pay for imports and what we fetch for exports. Last December, that so-called “Canadian discount” surged to more than $60 a barrel. In essence, we had to export two barrels from the West to pay for each barrel imported to the East. The gap has since narrowed, but it still costs Canadians billions of dollars a year – hurting both oil companies and consumers. Almost half of Canada’s petroleum export revenue now goes to pay for petroleum imports.
The Canadian discount is commonly attributed to clogged southbound pipelines, but this is false. Export pipelines will continue to have capacity for a while, depending on how fast bitumen production grows.
The problem is that the regional market those pipelines serve, in the U.S. Southwest, is saturated. Other oil, including new shale oil, has flooded that market, refineries are full-up and U.S. demand is sluggish, partly because of energy conservation measures.
Politicians at all levels now routinely invoke the Canadian discount as a scapegoat for all their fiscal ailments. Alberta Finance Minister Doug Horner singled out the price differential when he revealed a surprise $3-billion provincial deficit. Federal Finance Minister Jim Flaherty did the same, referencing the issue in explaining why his government is $5-billion behind its budget target.
This is unconvincing, especially at the federal level. Since Ottawa collects no oil royalties, any fiscal benefit from oil exports is indirect and modest, captured largely through corporate taxes from oil companies – taxes that Ottawa has cut in half since 2001. Indeed, Ottawa typically collects less than two cents from each dollar in upstream oil revenue.
For the rest of this column, please go to the Globe and Mail website: http://www.theglobeandmail.com/commentary/getting-hosed-by-the-canadian-discount/article8754199/?ord=1