State of America Series: U.S. and Canadian Oil - Who should be worried?

Thursday, May 5, 2016

U.S. and Canadian oil: Who should be worried?
by Stephen R. Kelly

The Canadian energy sector has certainly taken a beating over the last year. Dreadfully low oil prices, shrinking royalties, falling investment and interminable talks on building intra-Canadian pipelines have all been part of a worrisome mix.

One of the lowest points may have come last November when President Obama formally, and forcefully, rejected the Keystone XL pipeline, citing climate change priorities that raised questions about the future U.S. appetite for Canadian crude.

All this makes a series of recent reports from the U.S. Energy Information Administration sound unexpectedly positive.

Far from being in a death spiral, the latest EIA data suggests the U.S.-Canada energy relationship has never been better. In fact, the place that Canadian oil now occupies in the U.S. has grown so large it begs the question of whether it’s the Americans who should be worried, rather than Canadians.

The most recent tidings of good cheer from the EIA come in a report on Canadian oil exports for January 2016. That month Canada exported 3.4 million barrels a day of crude oil to the U.S., a record for Canada, and also the largest monthly total by a single country ever recorded by the EIA. When you add in refined products and other petroleum liquids, Canadian exports soared past 4.1 million barrels a day, a total that is higher than the next seven U.S. suppliers combined, and nearly four times more than Saudi Arabia, the U.S.’s second largest source of foreign oil. Canada alone provided the U.S. with nearly 40 percent more petroleum than all 13 OPEC countries combined.

In case you think January might just have been a fluke, a second EIA report shows that for all of 2015, Canadian crude exports averaged 3.2 million barrels per day, which set a new calendar year record. In fact, Canadian crude exports have set records for the past six years in a row. No country has ever sent another country as much oil as Canada is now sending to the U.S.

As impressive as these volume totals are, the share of the U.S. oil market Canadian petroleum now occupies is even more dramatic, and perhaps even worrisome from a U.S. perspective.

Canadian crude made up 45 percent of all U.S. imports in January, just behind a record 46 percent share of the U.S. market first set in December 2014 …by Canada! For all of 2015, the Canadian share was 43 percent, also a record. The only other country to have ever come as close is Saudi Arabia, which in May 1991 provided a mere 32 percent of total U.S. crude imports.

The fact is that the U.S. has never been so dependent on a single supplier, and the trend is likely to continue for several reasons.

The first is that the U.S. is importing less oil today than just a few years ago due to booming domestic production. The EIA reported that U.S. crude oil imports in 2015 were down 27 percent from their high in 2005, when the shale oil revolution was just getting under way.

With fewer imports overall, the surging Canadian exports occupy an even greater percentage share.

The other key trend is that Canadian oil production is also increasing. The EIA in February reported that Canada pumped an average of 4.5 million barrels a day in 2015, and predicted this would rise to 4.8 million in 2017 as oil sands projects under construction when oil prices began to fall in 2014 come on line. If oil prices revive in the near term, as seems possible, this production could increase further.

Canada has been the U.S.’s largest oil supplier since 2004, and its U.S. exports have increased nearly 50 percent in just the last five years. With more oil to export, this trend is likely to continue.

In short, despite the current gloom in the Canadian oil patch, the worries may be ill placed. Indeed, perhaps the Americans are the ones who should be worrying.

Winston Churchill famously warned at the dawn of the petroleum age that the best way for a country to protect its energy security was to avoid getting hooked on too few suppliers. Churchill’s advice has guided U.S. energy security thinking for much of the last five decades. So you have to wonder what he would make of the U.S.’s growing dependence on Canada for a vital energy resource.

To put this in context, the U.S. remains the world’s largest oil consumer by far, but in 2013 China passed it as the world’s largest oil importer. Even so, China’s biggest oil supplier, Saudi Arabia, only provided 16 percent of its crude in 2014, less than half the U.S.’s reliance on Canada.

Canada, of course, would love to export more oil to countries other than the U.S., but it lacks the pipeline infrastructure to move Alberta oil sands product to coastal export terminals. The U.S. meanwhile has refineries well adapted to processing heavy, sour Canadian crude, and a transportation system that is and will remain overwhelmingly oil-powered for decades to come.

The EIA reports suggest Canadians have less to worry about in their energy relations with the U.S. than their customers down south.

Stephen R. Kelly is visiting professor at the Sanford School of Public Policy at Duke University in Durham, North Carolina. He served 28 years in the U.S. Foreign Service, including postings as Deputy Chief of Mission at the U.S. Embassies in Ottawa and Mexico City, and U.S. Consul General in Quebec City. He has published articles on border, energy and Canadian issues in the New York Times, the Wall Street Journal, the Toronto Globe and Mail, and the Chicago Tribune.

Contributors:  Adam Daifallah - John Parisella - Stephen Kelly - Elisabeth Vallet - Tom Velk - Donald Cuccioletta

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