Editor’s Pick: Canada as an Energy Superpower?

As oil prices continue to climb, how are oil exporters wielding their newfound leverage or rather what sort of leverage do they have?   Some have been building regional institutions (say the re-delayed Bank of the South) providing loans or investing in military equipment. Most evidence of the political heft of oil seems to be revealed domestically (for example centralization of power in many states) or in their near abroad rather than on a global scale.  The geopolitical implications of higher oil prices if not the geopolitical drivers of oil prices remain somewhat obscure.

In a recent paper, Annette Hester of CIGI contributes to some of the debate on how energy exporters might wield such power and to what ends. To do so, she deconstructs the the Harper government’s assertion that Canada is an emerging energy superpower.

The  prime minister’s claim – which he has sprinkled in a series of global speeches is based on the assessment of Canada’s oil reserves  – which when oil sands are included –   have vaulted Canada to the second highest reserves  after Saudi Arabia.  Because of extraction and conversion costs, the heavy oil from the oil stands requires at least $50-60/barrel oil – much higher than many sources. Oil price rises have made expensive and difficult to extract oil sources more economical – and forced a revision of many pricing and investment incentives.

Hester begins with an assessment of energy superpowers:

… although Saudi Arabia was, and is, the world’s largest oil producer (and perhaps the  only one with significant spare capacity), 7 there are almost no references in the media or in the academic or public realm to this country being an energy superpower. Perhaps this is intentional on Saudi Arabia’s part, as no other nation is as aware of, or dependent on, the fickle nature of oil markets.

producers have used their power primarily to influence prices – either by controlling supplies or access to reserves. In political terms, however, the instances where energy (and in this case oil) was used to further a political objective, the reach was regional, as opposed to global.

But she argues, Canada does not really meet this definition:

Although energy resources are abundant, from the oil markets’ vantage point, Canada’s relatively small production – less than three millions barrels a day – defines the country as a price-taker, not a price-setter.  Moreover, the federal government does not control the resources enough to be able to effectively leverage them for a political purpose, and indeed appears not to aspire to achieve such control. 

Canada might not fit existing definitions of a energy superpower -and its not clear that this is a bad thing – since the political power of such resources seems more likely to be activated by turning off the taps.  energy does pose an increasing important role in Canada’s economy – as evidenced by the recent run-up in the Canadian dollar – up over 70% in the past 5 years and 5% in the last few weeks against the US dollar. 

Energy makes up an increasing value and volume of Canada’s exports – more so if one includes other subsoil minerals. The Canadian dollar which came close to hitting 1.09 yesterday (Nov 6) has been moving much more with the oil price in recent years and especially recent weeks and has been benefiting from the general move away from the US dollar and to commodities (and a variety of other currencies).  Rising exports of oil, related extraction-related capital inflows contributed to upward pressures on the canadian dollar. But the loonie’s rise wasn’t just driven by Canada’s resource wealth – long standing fiscal and current account surpluses help a lot too as does an overall strong growth outlook.  And like the price of oil, the loonie hasn’t risen by anywhere near as much against other currencies as it has against the dollar.

Canada may not seek to transform its resource leverage in geopolitical terms or be able to do so but its next challenge is to benefit from its positive terms of trade shock to cushion its exchange-rate sensitive export sectors.  so far large booms in the west  have contributed to Canada’s tight labour market – unemployment is at 4-decade lows-  and contributed to domestic demand across the country. Some of this divergence has lessened in recent months.

If so, Canada might be able to provide a model. Decisions like those pending in Alberta about what to do with the proceeds of energy revenues will provide a key. Will they be redistributed directly (As Premier Klein did some years ago) or invested in infrastructure which would benefit the province (and by extension some of the new investors and/or will more be saved in the $17b Alberta Heritage fund and later spent on long-term capital needs. Aside from coping with the increased economic costs of oil sands extraction – the environmental legacy remains in question – will alternative fuels also find a home? And finally how much pressure will these demands put on Canadian federalism – an increasing royalty take for Alberta means not only somewhat lower profits (though not so onerous a cut as some feared) but also a lower take for the federal government. And what effect will this have on the Canadian political map?

Perhaps some of the largest questions revolve around Canada’s links to the U.S.. already in 2007, export growth to other countries has far outpaced that to the U.S.  but all talk of diversification aside, the US still accounts for 3/4s of Canada’s exports. If the US slows down (and Canadian exports become too expensive) and if a US slowdown contributes to falling global commodity demand, some of the Canadian story might be challenged. More on this next week.

(UPDATE: see the NYT on the changing power balance brought about by oil wealth. )

0 Responses to "Editor’s Pick: Canada as an Energy Superpower?"

  1. Nicolas   November 7, 2007 at 2:48 am

    I believe the Canadian dollar should be valued higher rather than lower. Canada is in good shape and only borders the U.S. and can increase exports to the developing economies to make up for any loss of U.s. business.