The Trump energy policy calls for increased domestic oil and gas production and continued coal use, even though the policies, especially actively keeping aging coal and nuclear plants in operation, are not based on business logic. Dreamstime photo.
Trump energy policy may not create undue barriers, but doesn’t offer special opportunities for Canada
By Glen Hodgson
This article was originally published in The Globe and Mail on July 31, 2018.
The Trump energy agenda may not create undue barriers to entry for Canadian producers, but it will also not provide any special opportunities.
Like most other elements of President Donald Trump’s America First policy, there should be little expectation that Mr. Trump has any commitment to Canada when it comes to energy.
Starting with the Middle Eastern oil shocks in the 1970s, the U.S. became increasingly reliant on oil and gas imports to fuel its economy. Over the past 45 years, U.S. oil imports rose steadily to such an extent that by its peak in the mid-2000s, imported oil had climbed to nearly two-thirds of U.S. oil demand.
That cycle was broken a decade ago thanks to “fracking” – using advanced energy extraction technology to reach gas and oil reserves trapped in porous rock.
U.S. domestic energy production has since risen steadily, resulting in reduced reliance on imports of both oil and gas, as well as growing U.S. oil and gas exports.
The Trump administration wants to accelerate this trend. Exploration is being encouraged offshore and on federal lands. This expansion joins increased investment in tertiary oil recovery in the Bakken, Permian and other fields, and in gas exploration and production in many locations.
The Trump administration’s electricity policy is actively seeking to keep aging coal and nuclear plants in operation – despite the growing availability of cheaper electricity sources. The priority given to coal in particular is not based on business logic – there is little economic benefit from a return to coal-based electricity generation.
Natural gas for producing thermal power is now plentiful and relatively inexpensive, and renewable solar and wind-generated electricity is available at prices that are increasingly commercially competitive.
The most likely long-term impact of the Trump administration’s electricity agenda would be higher electricity prices for U.S. consumers, reduced profitability for utilities and higher-than-necessary greenhouse gas (GHG) emissions.
Although Mr. Trump walked away from the Paris Agreement on climate change, many states, cities and electric power producers remain committed to cutting GHG emissions in their jurisdictions.
Mr. Trump is also putting American energy interests first, even if it comes at the expense of historic relationships. The President’s criticism of German natural gas imports from Russia was a not-too-subtle message that Germany should diversify its sources of supply – by buying natural gas from the United States, rather than from Russia.
How do Canadian producers and exporters of oil, gas and electricity respond to the Trump energy agenda?
Since 2010, oil imports from Canada to the United States grew steadily to four million barrels a day in 2017. While this growth has effectively crowded out imports from many other countries, Canada is not fully benefiting, because Canadian crude comes with a significant price discount compared to global oil prices.
This is the cost for Canada of essentially selling to only one foreign market. Meanwhile, natural gas prices in North America have gone through a pronounced period of moderation, and imports from Canada by volume have essentially been flat.
Canadian electricity producers have tapped selectively into the U.S. market, offering utilities competitively priced electricity with low or no GHG emissions.
It seems like a long time ago, but the Canadian energy industry was pleased by Mr. Trump’s decision to support the Keystone XL pipeline project when he assumed office. Canadian energy firms share a common interest in maintaining a significant presence in the U.S. energy market – but should also understand the limits of that market to non-U.S. suppliers.
The bottom line? Canadian oil producers have had success in growing their U.S. sales and market share. The Trump energy agenda may not necessarily penalize Canadian suppliers, but it offers no particular advantages either.
It serves to re-emphasize the benefits of trade diversification and the need to take the many steps required to achieve it.
Reaching global markets directly is clearly in the strategic interest of Canadian energy producers, for both expanded sales opportunities and capturing better prices. But without adequate pipeline and shipping infrastructure, Canadian energy producers will remain dependent on a single buyer, the United States, with a fickle and self-absorbed energy agenda.
Glen Hodgson joined the Conference Board in September 2004, after 10 years at Export Development Canada (EDC). He also spent a decade with the federal Department of Finance, and served at the International Monetary Fund (IMF) in Washington D.C. during the 1980s as Advisor to the Executive Director for Canada, Ireland and the Caribbean. He is a Senior Fellow at the Conference Board of Canada.