How energy exports can transform Canada’s productivity and economic performance and create a brighter future for Canadians
Canada’s productivity performance is dismal, with no improvement over the last nearly 10 years.
Economists calculate productivity by dividing output value by the hours worked to produce it. However, the focus has often been on new, high-tech industries like information technology and artificial intelligence while overlooking the contribution of other sectors to overall value.
One of those key sectors is energy, where Canada holds significant competitive advantages. However, Canada does not fully capitalize on the value of its energy output. Currently, all of Canada’s oil exports are sent to the United States, primarily through pipelines from Alberta and Saskatchewan, with a small portion shipped from the Vancouver area to customers on the U.S. West Coast. Similarly, all Canadian natural gas exports are sent exclusively to the U.S., despite the U.S. already having a surplus.
The current situation significantly undermines the bargaining power of Canadian producers, leading to substantial discounts on natural gas and oil, including heavy oil sands, Western Canada Select, bitumen, and conventional crude oil. Fortunately, a radical change in the situation is expected either next year or possibly even later this year.
Why?
Canada LNG, the first of several possible West Coast liquefied natural gas liquefaction export terminals, is expected to begin shipping to foreign buyers soon, including utilities in South Korea, Japan, and other East Asian countries. The export capacity of the Kitimat, BC facility is 1.8 billion cubic feet per day, equivalent to 1.8 million gigajoules (GJ).
Natural gas is currently priced at approximately C$2.50 per gigajoule (GJ) in Alberta, while recent prices in East Asia were around US$16.70, equivalent to about C$22.25. The price difference is due to the cost to liquefy, load, transport, and re-gasify each GJ at the destination.
Once these costs are accounted for, each dollar of the price differential directly advantages producers and influences Canada’s balance of payments. The balance of payments impacts the value of the Canadian dollar and, consequently, Canada’s standard of living and, to some extent, inflation.
It might be overly optimistic to expect Canadian producers to reap a gross profit of C$10 per gigajoule (GJ), let alone the nearly $20 price difference. However, even if the profit is only $5 per GJ, it would still generate $90 million per day or nearly $33 billion per year. With total exports amounting to $596.9 billion in 2022, this would represent an increase of approximately 5.5 percent.
Translating this into the context of Canada’s current labour force of 20.5 million people, it would mean an additional $1,610 per person, significantly boosting productivity with relatively minimal extra effort, given that the necessary infrastructure has already been established.
But that’s not all. The TransMountain pipeline expansion is also scheduled for completion this year. All of its extra capacity of 590,000 barrels per day is slated for export. If we were to gain ‘just’ an extra $10 per barrel (typically, the U.S. heavy oil differential exceeds that), it would result in an additional $5.9 million per day or $2.15 billion annually.
This would also help improve our balance of payments, potentially making it positive once again, leading to a stronger Canadian dollar, increased productivity, lower inflation, and a higher standard of living. Australia, which now outperforms Canada, does not interfere with its own massive LNG exports.
A bright future awaits Canadians, but only if politicians can restrain themselves from blocking more oil or gas pipelines and LNG export terminals.
By Ian Madsen
Troy Media
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