The left­ward drift of oil mar­ket poli­cies

The Washington Times Weekly - - Commentary - By Ge­orge David Banks

Build­ing sta­ble en­ergy trade re­la­tions means count­ing on ma­jor part­ners mak­ing ra­tio­nal de­ci­sions. Un­for­tu­nately, the United States finds it­self sand­wiched be­tween the Cana­dian and Mex­i­can gov­ern­ments, which have lately pur­sued oil mar­ket poli­cies that make lit­tle sense for all in­volved. The re­sults will cul­ti­vate un­cer­tainty and could po­ten­tially lead to costly dis­rup­tion of Amer­ica’s en­ergy re­la­tions.

In Canada, a re­cent move by Al­berta Pre­mier Rachel Not­ley to force OPECstyle pro­duc­tion cuts in the prov­ince’s oil pro­duc­tion is caus­ing con­cern among many. Ms. Not­ley hopes that by man­dat­ing a 325,000-bar­rel-a-day re­duc­tion in Al­berta’s oil pro­duc­tion, she can raise West­ern Canada Se­lect oil prices and add an es­ti­mated $840 mil­lion to gov­ern­ment coffers in 2019. Sim­i­lar to OPEC’s strat­egy, the Not­ley plan as­sumes that squeez­ing oil sup­plies from Al­berta will raise prices.

Ms. Not­ley’s an­nounce­ment is ex­pected to af­fect about 25 pro­duc­ers, many of which are now left to won­der whether her com­mand-and-con­trol model for Al­berta oil is a har­bin­ger of things to come. “In­vestors will def­i­nitely worry that this is a slip­pery slope, and that the gov­ern­ment can cur­tail pro­duc­tion or in­ter­fere in busi­ness to pick win­ners and losers,” ex­plains Randy Ol­len­berger of the Bank of Mon­treal.

Keep in mind that Canada is still the largest ex­port­ing coun­try of for­eign crude oil into the United States. With Canada pump­ing about 4.1 mil­lion bar­rels a day into the U.S. mar­ket, any plan that aban­dons a mar­ket-based ap­proach to oil pro­duc­tion should be met with skep­ti­cism.

Iron­i­cally, Canada could have avoided low oil prices by solv­ing its trans­porta­tion con­straints and stor­age gluts. The so­lu­tion was new pipe­lines like the Trans Moun­tain ex­pan­sion, the Key­stone XL pipe­line and the North­ern Gate­way project — all stalled or shelved by Canada’s lib­eral fed­eral gov­ern­ment, Cana­dian courts, or the pre­vi­ous U.S. ad­min­is­tra­tion. In re­al­ity, the ap­proach by Ms. Not­ley and oth­ers to pur­sue any so­lu­tion but new pipe­lines had the only ef­fect it could have: dras­ti­cally lower oil prices.

South of the bor­der, new Mex­i­can Pres­i­dent An­drés Manuel Lopez Obrador is pur­su­ing his own ques­tion­able en­ergy pol­icy. Elected on a na­tion­al­ist agenda, Mr. Lopez Obrador has pro­posed to al­lo­cate $23 bil­lion to boost oil pro­duc­tion for Mex­ico’s state-owned oil com­pany, PEMEX. The plan’s in­tent is to make Mex­ico more en­ergy self-suf­fi­cient and to lower gas prices.

First, PEMEX would in­vest more in oil ex­plo­ration, fo­cus­ing on on­shore and shal­low wa­ter ar­eas in the south­east basins and tra­di­tional fields in the north. Of­fi­cials ex­pect oil pro­duc­tion to rise more than 50 per­cent to 2.6 mil­lion bar­rels by 2024.

Sec­ond, Mr. Lopez Obrador is build­ing a new re­fin­ery in his home state of Tabasco, as well as re­vi­tal­iz­ing Mex­ico’s six ex­ist­ing re­finer­ies. At a cost of nearly $8 bil­lion, Mex­i­can of­fi­cials hope the new flag­ship re­fin­ery can be built within three years.

Mex­ico’s plan, though, is fraught with prob­lems. The re­fin­ery isn’t likely to be com­pleted in three years. Si­mul­ta­ne­ously in­creas­ing ex­plo­ration while build­ing a re­fin­ery will be tax­ing for PEMEX, al­ready heav­ily col­lat­er­al­ized with $106 bil­lion of debt. Pipe­line taps have es­ca­lated in re­cent years, si­phon­ing off bil­lions in po­ten­tial prof­its from PEMEX. Mr. López Obrador’s re­sponse, uti­liz­ing tanker trucks in place of pipe­lines, has been in­ef­fec­tive in meet­ing con­sumer de­mand. The re­sult: at least six Mex­i­can states re­port­ing short­ages since the be­gin­ning of the year. Mean­while, oil prices are sched­uled to rise af­ter pro­duc­tion cut­backs by Rus­sia and OPEC, mean­ing cus­tomers aren’t likely to see lower gas prices.

To­gether, pro­pos­als by Canada and Mex­ico sig­nify a dan­ger­ous “left­ward drift” with Amer­ica’s ma­jor trad­ing part­ners when it comes to com­mer­cial en­ergy re­la­tions. They es­chew mu­tu­ally ben­e­fi­cial ap­proaches for feel-good, but costly, na­tion­al­ist poli­cies.

The ef­fect? Al­berta tak­ing mil­lions of bar­rels of oil per year out of the mar­ket will hurt in­te­grated pro­duc­ers, those with do­mes­tic re­fin­ery and up­grad­ing ca­pac­ity like Sun­cor En­ergy, Husky En­ergy, and Im­pe­rial Oil and could sig­nal the ad­vent of OPEC-style pro­duc­tion lim­its in Canada. In Mex­ico, Mr. López Obrador’s plan could ef­fec­tively halt Mex­ico’s oil trade, crip­pling PEMEX and rob­bing Mex­i­can cus­tomers of ac­cess to low-cost Amer­i­can fuel.

The bet­ter ap­proach? We should put into place a strong United States-Mex­ico-Canada Agree­ment (USMCA), re­sist depar­tures from free mar­ket prin­ci­ples and avoid these types of mar­ket in­ter­ven­tions. USMCA must be in place to ac­cel­er­ate the in­te­gra­tion of the North Amer­i­can en­ergy mar­ket, which will in turn in­crease Amer­ica’s en­ergy se­cu­rity. In ad­di­tion, we should fo­cus on longer term so­lu­tions, such as pipe­line and rail in­fra­struc­ture in­vest­ments to fa­cil­i­tate North Amer­i­can oil trade. The United States needs Canada and Mex­ico as re­li­able en­ergy trad­ing part­ners. But Amer­ica’s part­ners must first re-es­tab­lish busi­ness-friendly en­ergy poli­cies to en­sure North Amer­ica’s en­ergy trade con­tin­ues to flour­ish.

To­gether, pro­pos­als by Canada and Mex­ico sig­nify a dan­ger­ous “left­ward drift” with Amer­ica’s ma­jor trad­ing part­ners.

Ge­orge David Banks is Pres­i­dent Trump’s for­mer ad­viser on in­ter­na­tional en­ergy and en­vi­ron­ment pol­icy, and cur­rent ex­ec­u­tive vice pres­i­dent of the Amer­i­can Coun­cil for Cap­i­tal For­ma­tion.

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