The Trans Mountain oil pipeline moves into a new construction stage, in Acheson, Alta., in 2019.Candace Elliott/Reuters
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
Oil briefly hit US$125 on Thursday after U.S. President Donald Trump said the Strait of Hormuz blockade would continue for months.
It may seem odd to say that the oil spike caused by the war creates a dilemma for Canada, but the country must now make a difficult decision – and the United Arab Emirates’ departure from OPEC this week may just provide some guidance.
When I briefly taught in Canada at the start of my academic career, I used to introduce the topic of political culture by saying that Canadians were Americans in denial. The discussion was, as intended, “lively.”
My provocation wasn’t flippant, though. My point was that the Loyalists who had played such a central role in the foundation of the country were culturally and linguistically American but wanted to live in a different political system. Canada’s economic history was thus in no small measure a record of efforts to resist the natural economic pull of what would in time become an imperial power, and it began with the 1878 National Policy.
A century later, though, Canada pivoted toward the U.S. with a trade agreement that drew it deeper into the American nucleus, with few industries being more integrated than automobiles and the oil patch. But while free trade delivered prosperity, it also left the country vulnerable to the return of an administration that would seek to complete the task and absorb its northern satellite politically.
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For generations, the U.S. was a benign empire happy to allow Canada its sovereignty. That’s now changed, and there’s probably no going back. Canada’s U.S.-dependent industries, and the country itself, thus confront an existential dilemma.
The push from the government to diversify markets and products aims not to eliminate dependence on the U.S., but to reduce it to the point that Canada becomes less defenceless against economic coercion. But as the government creates a sovereign wealth fund to assist its push toward economic resilience, the country must also decide whether to invest in its existing big export industries or develop new ones. There’s a good chance the country’s future as an independent state may hinge upon the outcome of that decision.
The U.S. is now forging ahead into becoming what many commentators call a petrostate – not in the conventional sense of the term, which refers to countries whose economy depends largely on exports of oil and gas, like the Gulf states. Rather, President Donald Trump wants to base America’s energy system mostly on oil and gas, and use that as the foundation for the low-cost energy that would power an industrial renaissance.
It could just work. The U.S.’s abundant supplies of oil and gas could help to produce cheap electricity, while its market is large enough to support car companies that run on internal combustion engines. And as tankers from around the world head to the U.S. to replace oil lost in the Strait of Hormuz, the U.S. could even secure dominance of global oil, at least for a time.
But the value of that dominance is diminishing. As Fatih Birol, the executive director of the International Agency recently said, the Iran war has changed the fossil fuel industry forever. It’s no longer about price but about security: 75 per cent of the world live in oil-importing countries, who need to insulate themselves from an increasingly volatile world. Thus, exports of Chinese renewable technology, already at an all-time high, soared 70 per cent over last year in just the first month of the war.
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The demise of oil would scarcely affect the U.S., though. With the sector accounting for a mere 1 per cent of its economy, the country has much else to fall back on, including a market large enough to support an internal-combustion car industry that seems headed for eventual obsolescence everywhere else.
However, that’s not the case for genuine petrostates, those which depend on oil and gas revenues for their export earnings and national budgets. That’s why countries such as Norway and Saudi Arabia are using their oil revenues to develop new industries based on renewable energy. Indeed, when the UAE announced its departure from OPEC, it signalled it wanted to maximize its revenues to accelerate its own transition before it was too late.
Canada, though not a petrostate, nonetheless has a less diversified economy than the U.S. and has come to depend considerably on resource exports south of the border. It now must choose: continue with this model, which would tie the economy more closely to the U.S.’s and quite likely, given the general thrust of American politics, destine Canada to eventually become the 51st state; or opt to base its political sovereignty on a greater degree of economic autonomy.
Put simply, Canada can opt to eventually join the American empire, or forge further out into the world, which would require it to invest heavily in accelerating its own energy transition – not least because its trading partners that phase out fossil fuels will likely put carbon taxes on carbon-intensive imports.
Canada can’t escape the force of U.S. economic gravity. But it can, if it chooses, push further out into orbit. And the choices we make today may well determine if our descendants live in an independent Canada.