In a previous post, Canada Fact Check took a look at the Harper government economic record and began an examination of the three economic legs of the Conservative economic plan: 1) reduced corporate taxes; 2) Canada as an “energy superpower”; and 3) an aggressive approach to balancing the budget rooted in curtailing government spending.
In today’s post, Canada Fact Check assesses the economic impact of the Conservative government’s policies aimed at turning Canada into an “energy super power”.
Canada as an “energy super power”: success or failure?
As Canada’s main stock market dropped more than 2% on Thursday and likely another 2% on Friday, Prime Minister Harper’s dream of making Canada an “energy super power” continued to fade.
How is the stock market correction related to Harper’s Canada as an “energy superpower” project?
Some history may help.
Riding record-high oil prices — $107 a barrel as recently as June, 2014 — Harper’s big bet on Canadian tar sands appeared likely to pay off. Oil production had driven a seven percent increase in national income, helping Canada emerge from the 2008-9 recession in better economic shape than most G7 nations. And with fossil fuels accounting for nearly 40 percent of net exports, the Conservative government was on track to deliver a budget surplus before the federal election in October.
But today, with the price of oil at $40 a barrel as opposed to $107, the Canadian economy is hurting – possibly slipping into a technical recession. Tar-sands producers have cancelled billions in planned investments and begun axing oil patch jobs by the thousands. The Canadian dollar, recently at parity with the U.S. dollar, has dipped to about 76 cents. Instead of a federal budget surplus, economists are now projecting a $2.3 billion deficit.
While the provinces have full rights to resource royalties, there are still significant federal fiscal benefits from oil by way of GDP growth and the resultant increase in federal corporate and payroll tax revenue. In other words, when oil prices drop and producers cut back, federal revenues suffer.
And if low oil prices decline further, the economy will likely get worse. Most of Canada’s oil reserves are locked up in tar sands. The industrial operations required to get the oil from the ground to the gas tank can take years of construction to bring online.
Even under the best of circumstances, the economics of Canadian crude extraction are challenging. It requires huge upfront capital expenditures in heavy machinery to strip-mine raw tar sands, separate the tarry bitumen with heat and steam, and then upgrade the sludge into a synthetic crude, liquid enough to transport.
Alberta is landlocked and the primary refining capacity for its crude sits in the U.S. midwest. This gives the refiners the advantage. Even when oil prices were peaking last summer, Canadian oil traded at roughly $20 a barrel less than the benchmark price for West Texas Intermediate (WTI) — costing Canada billions of dollars.
Desperate to reduce that disparity, the Harper government sought access to the global export market — where oil prices are set by the market, not quirks of geography. Shipping oil at that scale requires pipelines. Thus, one of Harper’s earliest priorities was clearing the way for TransCanada to build a high-volume pipeline connecting Alberta’s oil patch to American Gulf Coast refineries.
But then the wheels fell off the Harper Canada as an “energy super power” dream. Why?
Essentially, the Harper plan for oil-sands expansion assumed that China’s double-digit growth would continue indefinitely and that the country’s surging appetite for oil would also continue unabated. That has clearly proven not to be the case. Based on the most recent numbers, China’s economy is growing at best at half its previous double-digit rate with some economists pegging growth as low as 3%. And that was before the collapse in the Chinese stock market (Shanghai Index) of the past few days!
All this has resulted in the Alberta oil sands projects being stranded in a world of slowing economic growth and plunging oil prices. The expansion plans that would have seen crude production almost double in the next fifteen years or so are no longer financially viable. Even at the WTI world price, new oil-sands projects don’t make economic sense, much less at the much lower price most oil-sands producers actually receive.
The billions of dollars of cancelled investment in oil-sands projects also calls into question the Conservative government’s economic argument for new pipelines. While the Harper government continues to lobby Washington and recalcitrant provinces such as Ontario and Quebec for the construction of these pipelines, there is little evidence that the world needs Canada’s high-cost oil. That’s because the very oil patch projects that were going to produce crude for these pipelines, are now experiencing huge spending cuts due to low oil prices. In fact, it is not clear that any of the proposed pipeline projects – Northern Gateway, Energy East and Keystone XL – has an economic rationale in today’s oil market.
To bring the above analysis down to the firm level, here is an excerpt from an Aug. 19th Reuters’ report on a presentation given by a senior executive of Syncrude Canada, one of the largest players in the tar sands.
Syncrude Canada Ltd, a joint venture project in northern Alberta at which mined oil sands bitumen is upgraded into refinery-ready synthetic crude has a break-even production costs of C$57 ($43.46) a barrel, according to a presentation from Siren Fisekci, vice president of investor and corporate relations.
That is around $6 higher than the current outright price for synthetic crude, which yesterday settled at $37.37 a barrel. Synthetic crude has been below $43 a barrel since early August as its discount to benchmark U.S. crude SHRSYNMc2 widened and global oil prices CLc1 LCOc1 dived.
The cost to COS to produce Syncrude’s fully upgraded oil is even steeper at C$62 ($47.27) a barrel once interest payments, administration, insurance and other costs are added in, according to the presentation at the EnerCom Oil and Gas conference in Denver, Colorado.
Canada’s oil sands, home to the world’s third-largest oil reserves, also feature some of the highest operating costs and lowest prices in the world. Benchmark Canadian heavy crude has collapsed to 12-year lows at near $20 a barrel, raising questions about whether some operators would simply shut down to wait out the slump rather than carry on pumping at a loss.
And to bring the narrative back to the opening paragraph of this post and the last few days’ stock market sell-off, the heavy weighting of the energy sector (roughly 20 per cent) in Canada has cast a pall over the performance of the entire TSX. And when the stock market corrects, RRSP’s suffer further sapping the confidence of average consumers.
The last post in this series on the Conservative economic record made the case that the government’s policy of lowering the federal Corporate Income Tax rate didn’t produce the expected business investment in machinery and equipment and cost the federal treasury badly needed revenue. This post suggests that a second Conservative, “signature” economic policy – initiatives designed to promote “Canada as an energy super power” – has also failed.
The next post will look at a third “signature” economic policy of the Harper government, the high priority placed on balancing the budget by 2015-16 and the fiscal policies implemented to get us there.
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