It’s not merely the delay in construction that’s causing problems. It’s also delays in expanding our oil exports to the world and being ambivalent to foreign investment. Canada’s problem results, in part, from the damaging effects to the Canadian dollar, our prices of exports versus imports and the faltering investment into our country.
Prices for many of Canada’s exports are depressed, including for oil, gas and a few other minerals. Our biggest export is, in fact, oil, including oil sands bitumen. These valuable exports pay for our imports of food and other consumer goods.
Western Canada Select (WCS) is the benchmark oil blend priced at Edmonton refineries, now selling at a discount to West Texas Intermediate (WTI), the U.S. standard. The spread between the two standards widened recently from about $5 to more than $15 a barrel, meaning less money comes into Canada from exporting crude oil to the United States. This despite world and U.S. oil prices rising nearly $20 in under a year.
Canada’s balance of trade has been chronically negative for several years, pressuring the loonie down as a result. Balance of trade is the total value of exports minus imports, also called the trade surplus or deficit. Higher prices or volumes, or both, increase the total value of exports.
The cancellation of the Energy East pipeline and the federal disapproval of the Northern Gateway pipeline leave just two or three alternatives to deflate our artificially low price bubble.
If the Trans Mountain expansion proceeds, it will alleviate the surplus of both conventional and oil sands product, reducing the WCS-WTI spread. It will also boost the volume exported at a much higher international price (higher than WTI). Even better, if Enbridge’s Line 3 pipeline between Alberta and Manitoba, and TransCanada’s Keystone XL are built, there will be far more exports, albeit just to the U.S.
Of course, other things also affect exchange rates. Among the most important are short- and long-term borrowing and direct foreign investment in assets and companies, shorter-term borrowing and investor capital flows in response to interest rates, and the perceived risk and reward of parking money in Canada for investment. Interest rates are still depressed to foster otherwise reluctant investments.
Canada’s investment appeal to foreigners has decreased in recent years largely as a result of the Trans Mountain delays. Fewer investors and fewer euros, yuan, yen and pounds competing to buy our dollars or assets impedes the creation of jobs for Canadians. And it helps perpetuate the inability of Canadians to afford housing in our large cities.
Trade and investment suffer from negative perceptions of Canada’s investment climate and our ability to get projects done, and from the higher taxes we pay versus those in the United States.
If we increased our exports and the loonie rose to US$0.90, our standard of living would be about 14 per cent higher than what we have today with a loonie at US$0.78. Think what you could do with 14 per cent more purchasing power.
If the oil price spread contracts and our trade deficit shrinks as oil flows to markets, and investors find us more inviting, that increased purchasing power should happen.
Canadians must tell their leaders that they want a more vibrant, dynamic and viable economy. And they should tell those leaders to make it happen.
Ian Madsen is a senior policy analyst at Frontier Centre for Public Policy.
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