Evidence filed by Trans Mountain with the Canadian Energy Regulator shows that the proposed tolls to ship oil to China are $9.19 per barrel higher than shipping on an Enbridge pipeline to the U.S. Gulf.JASON FRANSON/The Canadian Press
Thomas Gunton is professor and founding director of the Resource and Environmental Planning Program at Simon Fraser University and recently completed a report for the International Institute for Sustainable Development on the Trans Mountain Pipeline.
The upending of international trade by the Trump administration has posed an existential crisis for Canada.
But while there is a consensus that we need new strategies to confront the threat, we need to be careful that we do not simply make things worse by ill-advised initiatives cobbled together in the heat of the crisis.
Nowhere is this truer than in the energy sector, where one of the proposed solutions is to streamline the review process and build more pipelines to allow our energy exports to be shipped to other markets.
While such a strategy has intuitive appeal, it would end up being a costly blunder that would do more harm than good to the Canadian economy.
The problem is that the world demand for oil will peak by 2030 and then begin to decline. No one knows for sure what the rate of decline will be, but both the International Energy Agency and private oil companies such as BP forecast a small to significant decline as high as 75 per cent by 2050, depending on future climate policies.
In this environment, investing in a major expansion of oil production in Canada, which is among the highest-cost producers in the world, is highly risky, especially given the unused low-cost oil production capacity in the Middle East.
And even if Canadian production increases, the Canadian Energy Regulator concludes that there is sufficient pipeline capacity in place – with minor low-cost expansions of existing pipelines – to meet even their most optimistic demand forecast.
In this environment, building new pipelines to diversify our export markets would simply duplicate existing pipelines we have already built that ship oil to the United States.
But building new pipelines to divert oil shipments from the U.S. would not be worth the benefits for several reasons.
First, even under the most expedited approval process it would still take at least four to five years to build a pipeline, thus providing no benefit in the foreseeable future or for the duration of the Trump presidency.
Second, the costs of duplicating existing pipelines would be enormous. The expanded Trans Mountain pipeline, for example, cost just over $34-billion to add 590,000 barrels per day of new capacity. At this rate, diverting all four mb/d exports shipped to the U.S. would cost $235-billion and building this new capacity, let alone financing it, would be prohibitive.
And even if we were able to add major new capacity at a slower rate, the incremental shipment costs would be higher than any likely long-term tariffs on Canadian oil exports.
Evidence filed by Trans Mountain with the Canadian Energy Regulator shows that the proposed tolls to ship oil to China are $9.19 per barrel higher than shipping on an Enbridge pipeline to the U.S. Gulf, even at the taxpayer-subsidized tolls that cover less than half the cost to build the pipeline.
If the full costs are covered in the tolls, which they would be in any new pipeline, the cost of shipping to China could be between about $13 to $22 per barrel higher than the U.S. Gulf, (depending on the method used to determine tolls).
At the average 2024 Western Canadian Select price of around $87 per barrel, producers would have to receive between 15 per cent and 25 per cent less per barrel shipped to the U.S. for the entire 40-year operating life of the pipeline before they would consider building one.
And that is based on the unlikely assumption that the existing pipelines would not lower tolls to retain shippers.
This is why no private company has proposed building a new pipeline and will not consider the option without a massive taxpayer subsidy, even if the review process is streamlined.
Canada exports about 80 per cent of its five mb/d oil production to the U.S., and the ability to shift these exports to other destinations is limited and not cost-effective.
It may have made sense to diversify export markets when the original pipeline infrastructure was being planned, or if there are any future expansions, but the die has been cast for oil. The infrastructure was built to serve the U.S. market given its proximity, and the age of expansion for oil and new major pipelines is over.
Canada needs to diversify its exports and strengthen its economy by, for example, removing internal trade barriers, investing in energy conservation and expanding interprovincial electricity infrastructure to meet the growing demand for clean energy. Clearly, we would be better off using our scarce capital on these and other needed investments with a higher return and negotiating the removal of tariffs instead of building duplicate pipeline capacity that will make us worse off.