If oil and gas are dead, why are exports booming?
Statistics Canada last week reported that energy exports reached $12.0 billion in August, more than recouping all their losses during the pandemic. Exports topped their March 2019 high of $11.4 billion and are closing in fast on their all-time peak of $12.8 billion set in 2014. The increase was driven by sharply higher exports of both crude oil and natural gas. Despite all the hype surrounding electricity exports, they earn less in a month than oil and gas generate every day.
The surge of energy exports is a dramatic reversal of fortune from their low of $3 billion a month during the depths of the pandemic, when oil prices briefly went negative for technical reasons related to a lack of storage capacity (negative prices imply that sellers paid buyers to physically take possession of their oil).
Opponents of Canada’s oil industry gleefully leapt on this one-day anomaly of negative oil prices to chortle that the industry had no future. Their pronouncements at the time make for interesting reading today. Green Party parliamentary leader Elizabeth May told reporters that “Oil is dead and for people in the sector, it’s very important there be just transition funds.” Bloc Québécois leader Yves-françois Blanchet predicted oil is “never coming back” and that “it is clear that there is no longterm future for that kind of industry, so let’s help them go somewhere else, something which is more green.” Wiser heads were more cautious, recalling that sharp declines in oil prices have rarely lasted more than six months. The strong recovery of prices over the past year proves that their nosedive in spring 2020 was just another cyclical decline, albeit an extreme one, given the sharp economic slowdown, and did not signal the end of fossil fuels.
The recovery of oil and gas is a result of the pandemic receding and revived demand running up against sharp cutbacks to investment in new supplies during the pandemic, notably for shale oil in the U.S. and natural gas in Europe. The benchmark price for crude oil in North America has surged past US$75 a barrel, with investment bank Goldman Sachs speculating prices could reach US$100 a barrel by year’s end. The rise in natural gas prices to US$6 per million BTUS is even more impressive after years of low prices in North America.
Some of the gas price increase reflects the development of an integrated global market, after decades in which prices in Europe, Asia and North America often diverged for long periods. Record prices in Europe and Asia have siphoned off 10 per cent of U.S. natural gas production, with American exports rising 42 per cent in the past year. The U.S. had the foresight, appetite for risk and co-operation of governments to build LNG export terminals, mostly along the Gulf coast. Canada didn’t. We dragged our feet, refusing to approve LNG export terminals in Eastern Canada while acting on only two of 20 LNG proposals for British Columbia. Canadian producers do profit from rising gas prices in the U.S., but U.S. producers receive much higher prices in Europe (over $20 per million BTUS). If they had the export capacity, it would pay U.S. producers to cede their entire domestic market to Canada and concentrate exclusively on supplying overseas markets.
The Economist magazine recently summarized the complex of factors boosting overseas natural gas prices. A shortfall of renewable power plays a key role. Drought in Asia curtailed hydro power production there, while power plants shifted from coal to gas for environmental reasons. Gas production dropped in Britain and the Netherlands as firms nervously refused to invest when green energy proponents held sway in European capitals, while calm winds reduced wind generation in northwest Europe. Europe has fingers crossed that exports of Russian and U.S. gas will make up the shortfall of
supply entering the winter months — but the prospect of power shortages and outages looms large. Meanwhile the gas shortage encourages Europe to burn more coal, the opposite of what was promised to meet its Paris Climate Accord goals. In their rush to switch to renewable energy, European countries did not ensure the reliability of supplies to replace fossil fuels, a mistake Canada simply cannot afford to repeat, given our harsher winters.
Booming oil and gas exports are solidifying energy’s place as our leading export. It now single-handedly accounts for 22.1 per cent of all merchandise exports, dwarfing all other exports and more than double auto exports of $5.6 billion per month. Even without the construction of the Keystone oil pipeline extension in the U.S. or more LNG export terminals at home, the future looks bright for oil and gas exports. The recent opening of the Line 3 pipeline expands capacity to the U.S. market while exports from the west coast will grow when the Trans Mountain pipeline and LNG Canada projects come on stream in 2023.
People who declared Canada’s oil and gas industry as dead as the parrot in the famous Monty Python skit demonstrate little understanding either of the industry’s ability to adapt to rapidly changing circumstances or the world’s ongoing need for reliable fossil fuel supplies. We remain every bit the energy superpower Stephen Harper proclaimed us in his first speech as prime minister in 2006 and our energy industry will continue to grow despite the roadblocks erected by governments and regulators.
THE SURGE OF ENERGY EXPORTS IS A DRAMATIC REVERSAL OF FORTUNE FROM THEIR LOW.