It’s the crude, dude

Sorry Linda McQuaig, but that was the worst title ever for a book. Still, I could not resist using it, so what does that tell you?

Last week, Statistics Canada released a short report, Boom Times: Canada’s crude petroleum industry (summary in the Daily here and full report here). Here is an interesting tidbit from the summary:

In total, Canada produced 136.4 million cubic metres of crude petroleum in 2005, about two-thirds of which came from Alberta. The massive oil sands resource accounted for 42% of the province’s total production.

Saskatchewan was a distant second, contributing about 18% of total Canadian crude production, while Newfoundland and Labrador’s offshore oil rigs accounted for about 13%. In 2005, as a result of a 30% surge in prices, Canadian oil exporters got $30 billion for their products, up from $25 billion the year before, even though there was a slight drop in the volume of crude oil exports.

Canada is both an exporter and an importer of crude oil. Canadian companies exported about 63% of our domestic production, the vast majority of which headed south of the border to a thirsty American economy. In 2005, Canada supplied almost 10% of American crude oil needs.

Domestic crude accounts for only about 45% of Canada’s oil consumption. Imports represented the remaining 55%, mostly coming from either North Sea countries or the Middle East. Imported oil feeds refineries mostly in Eastern Canada.

Here’s the rub: since we export almost two-thirds of our production, mostly to the US, because of NAFTA rules we are committed to guaranteeing them that share of our production into the future (more if the share goes up). That is, should the Middle East really catch fire and imports from there get cut off, we would be hard pressed to meet our domestic needs out of the one-third that remains. Ditto if we decided to conserve this valuable resource, whose value will only rise with time, by limiting production.

This infamous “proportional sharing” provision is a huge problem with the original Canada-US FTA and subsequent NAFTA. This is codified as NAFTA Article 605(a) and it is notable that Mexico, presumably with better negotiators than Canada, exempted itself from this requirement.

In the context of our recent capitulation to the US on softwood lumber, one good argument that came out during the dispute was that if the US is going to deny us the benefits of our negotiated agreement, we should deny them provisions of the agreement too: I would have picked the energy provisions and the investment provisions. That would have gotten their attention, and perhaps, their respect. But as long as we accept being a doormat they can step on whenever it suits their domestic political interests, we are destinted to be stuck in bad trade deals.

Another key part of the Statscan paper is reinforcing the well-known fact that most of the oil production is in Alberta. High prices are leading to huge royalties to the Alberta government that undermine federalism in the sense of provinces being able to provide roughly equivalent services at comparable levels of taxation. This is the real fiscal imbalance in Canada, but one that won’t get much play when the feds and provinces meet this Fall.