The National Interest Case for Supporting Energy Producers

To repower the economy, Canada will need to help, not hamper, the oil sector
David Detomasi
Pump Jacks working out in Weyburn Saskatchewan, Canada.

Buried underneath today’s coronavirus headlines is another shock that, in the long-term, may be more consequential to the Canadian economy: the battle over global oil prices and supply. Last month, that battle heated up when collaboration between OPEC and Russia on the amount of oil they collectively dump on the global energy market came to an abrupt end.

Their shaky production alliance—cobbled together to help manage global oil prices upon which their respective economies depend—broke down on March 9. Saudi Arabia alone began dumping 10 million barrels per day on the export market, sparking an all-out price war. Oil prices subsequently dropped between 20 and 30 per cent, much of it in a single day. 

Though Russia and OPEC now seem headed towards forging an agreement to contain the price war, a lot of damage has already been done. 

Much of that damage fell on Canada, particularly on Alberta, whose producers are still staggering from the 50 per cent drop in prices they suffered some five years ago. The latest price plunge has become another blow, putting the price of Alberta crude to below $5 a barrel on global markets. To top it off, Canadian producers have faced relentless environmental criticism for the "dirty oil" they extract, much of that criticism hurled at them by their fellow Canadians. Bickering and indecision from provincial and federal governments, and an apparently endless consultative process with Indigenous peoples and outside stakeholders, now adds years if not decades to the investment process.

It’s no wonder that major energy investors, ranging from Teck Resources to Warren Buffet, now shun Canada. Or that energy companies that once called Canada home are now leaving, taking their jobs, expertise and tax dollars with them. 

Taken together, some might speculate—even quietly hope—that this "perfect storm" just might force Canada out of the carbon production game for good. That should not be allowed to happen. It is in Canada's national interest to remain a significant player in oil and gas production.  Here's why.

The case for Canadian energy 

To begin, the world still needs a lot of carbon-based energy, and will for decades to come. Global oil consumption­—before coronavirus hit—measured over 100 million barrels a day. That total is projected to rise before it eventually falls. Canada contributes 4.5 million barrels a day to that total, and its massive reserves are proven, which lends a bedrock of stability to a volatile global market.  

Second, eliminating Canadian oilsands production will not contribute much in efforts to fight climate change. True, oilsands production is more carbon-intensive than more conventional sources. But that gap is closing, and indeed, fades to irrelevance when emissions created by the burning, as well as extraction, of fossil fuels are included in overall totals.

Third, whatever oil Canada stops producing will be replaced by other nations more than happy to fill the gap. We will lose a lot economically: the mitigation of climate change will be negligible, and we will be giving a fiscal boost to countries who, shall we say, do not always share Canadian values.  

Fourth, we are good at this. Canada’s strength in energy production—in engineering, finance and specialized ancillary services—took decades to build, and the sector's performance still matters to anyone who has a pension, mutual fund or stock-market investments. That expertise now extends to managing environmental and social activist pressure, which Canadian companies have faced for decades. As a result, our companies have improved their performance in ESG (environmental, social and governance) measures to the point where they are among the world's best. They are well positioned to prosper, as investors increasingly value such things. 

Eliminating Canadian oil from the global production mix would lower the industry's overall ESG performance, would contribute little to reductions of either oil use or carbon emissions, and would empower regimes abroad that do not share Canadian values on how to produce oil or what to do with the ensuing revenue. That outcome seems less than ideal.  

What should we do about it?

To begin, you cannot influence a game you do not play. Some steps seem obvious. Companies need regulatory clarity. Without this, investment will be choked—particularly those in technologies designed to reduce environmental footprints. Companies need a manageable consultative process with Indigenous peoples and stakeholders that does not bog down investment interminably. They also need encouragement, not constraint, in building the infrastructure needed to move what they produce to export markets. Above all, they need leadership from a federal government that clearly values what Canada’s energy producers do and how they do it. 

Selected support measures could include price supports, to direct investments in companies that could be sold later at a profit, to putting tariffs on imported oil. Such measures have much historical precedent. They could be amended as the industry recovers, but would be useful now.

Canadian citizens can also help.  A first step is to temper altruism with a dose realism. We can push for greener technologies and policies in overall energy production.  But it will take decades for those technologies to fully replace carbon in the energy mix. Meanwhile, responsible, profitable carbon-based energy production in Canada generates jobs, taxes, expertise and national security, right now. Being a significant producer also allows Canada to help coax the market into greater ESG performance that the world will increasingly value. It is OK to promote that too. Democracies—of which the world’s oil-producing nations boast few—can do more than one thing at a time. 

Canadians should be proud, not embarrassed, of the energy we produce. Yet we often apologize for it, and even hamper it. How very Canadian.

Associate Professor David Detomasi is Distinguished Faculty Fellow of International Business at Smith School of Business

Smith School of Business

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