Does Canada Need a Strategic Petroleum Reserve?

The International Energy Agency requires member countries to maintain emergency oil reserves in case oil imports are temporarily disrupted. Canada was exempted from this requirement because we are a net oil exporter.

However, the current pipeline system and NAFTA’s energy chapter limit our ability to supply eastern Canadian consumers with western Canadian petroleum. Western Canada’s vast oil exports to the US do not meaningfully reduce eastern Canada’s dependence on oil imports from the Middle East.

On this basis, Gordon Laxer argues for the establishment of a strategic petroleum reserve in eastern Canada. His report includes me on the “Acknowledgements” page. So far, it has garnered front-page coverage in Le Devoir, a national segment on CBC radio, and a response from New Brunswick’s Energy Minister.

UPDATE (Feb. 7): Laxer has the following op-ed in today’s Globe and Mail:

It’s not nice to let Eastern Canadians freeze in the dark

Thursday, February 7, 2008

Page: A19

Section: Comment

Byline: Gordon Laxer

When Cape Bretoners were hit with a furnace-oil shortage in December as the result of an early winter and late-arriving fuel tanker, it concentrated the mind: With icy winter now gripping Canada, isn’t it time to counter the threat of longer and more widespread oil shortages in the near future?

Canada is usually an avid joiner of international conventions. But we’re the odd country out in not having strategic petroleum reserves – emergency storage pools of oil that can be released by government to meet consumer demand, usually for 90 days, during supply disruptions. So why haven’t we set up such reserves?

It is widely assumed that Canada doesn’t need to. After all, we have the second greatest supply of oil in the world. Prime Minister Stephen Harper boasts to every foreign leader that Canada is an energy superpower. But this superpower has an Achilles heel. We produce more oil than we consume but export two-thirds of it to the United States. Meantime, we import oil to meet 90 per cent of Atlantic Canadians’ and Quebeckers’ needs. Politically volatile OPEC countries, including Algeria, Iraq and Saudi Arabia, supply almost half of Canada’s imported oil.

The problem is, we cannot divert exported oil during emergencies to Eastern Canadians because there is insufficient pipeline capacity to get western oil to Eastern Canada and because NAFTA’s proportionality clause, requiring Canada to export the same proportion of energy even if we experience shortages at home, stand in the way.

Thus, despite having plenty of oil, Canada is in the same boat as other oil- importing countries. When 47 countries conclude that international oil supplies are precarious enough for them to build reserves, why hasn’t our government made plans for supply crises?

Natural Resources Canada and the National Energy Board are complacent about oil security because they’re focused on meeting U.S. energy security, and say international supplies are plentiful. They also believe oil is interchangeable with all other oil in the world.

Those assumptions no longer hold. International demand for oil is rising rapidly, while production levels stand still. As late as 2002, spare capacity exceeded world oil consumption by 10 per cent. Now it is down to 2 per cent – hence the recent price volatility. China and India are making long-term contracts with producers, further reducing the availability of oil on spot markets. These trends mean that future supply crises will be more frequent, longer lasting and more devastating.

We should have 90 days supply of imported oil. In 2006, we imported 849,000 barrels a day. Ninety days worth is 76 million barrels. But storage facilities are expensive to build and incur significant operating costs. We should reduce the size of the reserves we need, and our vulnerability to supply shocks, by cutting oil imports.

If Canada reversed the Montreal-to-Sarnia pipeline, which brings foreign oil through Southern Ontario, Western Canadian oil would flow to Quebec and reduce imports by almost a third. Taking the portion of Newfoundland oil that is currently exported and redirecting it to Eastern Canada would further reduce imports. In combination, the two measures would cut imports to about half of current levels. Canada would need about 38 million barrels in its reserves.

Our strategic reserves would be mainly used to shield Eastern Canadians from oil supply shortages, but they could also be used to shield Canadian consumers from sharp price surges. These reserves are not the full answer to Canada’s energy challenges. We need to substantially reduce oil consumption to cut imports and greenhouse-gas emissions. Energy strategy must also be redirected to a Canada-first orientation so that, when Canadians cut fossil fuel consumption, the surplus is not merely exported to the United States.

It is time for Canada to urgently join all other industrial countries in establishing strategic petroleum. It is irresponsible to let Eastern Canadians freeze in the dark.

Gordon Laxer is author of Freezing in the Dark: Why Canada Needs Strategic Petroleum Reserves, a report released by the Parkland Institute and Polaris Institute.