The Obama administration’s rejection of the Keystone XL pipeline application has focused Canadians on the future of our energy exports. What does this mean for this key sector, and our trading relationships?
The reality of world energy demand is that it will increase by a third between 2010 and 2035, and that hydrocarbons will remain dominant – supplying almost three-quarters of global energy needs. Canada should stand to benefit if hydrocarbons remain a key energy source.
To reap these benefits, we need to recognize that less than 10 per cent of this increase in energy demand will come from OECD countries; rather, the drivers of energy demand are emerging economies, particularly in Asia. The sources of energy are also shifting: to unconventional oil and gas and to more unconventional geographies.
These realities should cause us to reflect on four propositions:
We should diversify our trade relationships and investment links. The global centre of economic gravity is shifting toward Asia. This year alone, 80 per cent of global growth will come from outside the OECD countries. And yet, 75 per cent of total Canadian exports still go to the United States. No dynamic emerging economy accounts for even 1 per cent, except China at less than 4 per cent.
We need to become a nation of traders and a global trade leader. This will require innovative trade and investment agreements with a select group of dynamic emerging economies that are complementary to our economic strengths.
We shouldn’t have all our energy eggs in one basket. The U.S. is, in practical terms, the only market for our oil and gas exports, and basic economics suggests you seldom maximize the value of what you’re selling when there’s only one buyer for your products.
The longer-term security of demand for our oil is affected by the U.S. willingness to permit pipelines – like the rejected Keystone project – to carry our increasing capacity to export unconventional oil. The International Energy Agency projects U.S. oil consumption to decline significantly by 2035, and China will substantially surpass it as the world’s largest energy consumer. The ability to fully develop our unconventional oil and gas capacity will hinge on our access to Asian markets.
We should be seeking a more strategic approach to our energy future. Although Canada’s energy sector is one of our core economic advantages, there’s no consistent and concerted game plan for its development. When the national interest is so clearly at stake, the need for clear strategies to shape the new global reality to our best advantage seems evident.
We need leadership, anchored by our national interests. There are inevitable linkages and trade-offs among economic growth, energy use, environmental stewardship and standard-of-living objectives. The challenge is to address these trade-offs, and do so with the goal of improving Canada’s long-term prospects.
Leadership is all the more imperative because of the risks and opportunities we face in such a key sector at such a pivotal time. Our risk may be national complacency, and our riskiest choice may be the status quo. Shaping our energy future will require leadership – from all of us.
Last week, Prime Minister Stephen Harper told the World Economic Forum in Davos that his government is making it a priority to ensure we have the capacity to export our energy products to Asia. Next week, he travels to Beijing. The Obama administration’s Keystone decision will ensure that oil tops the agenda.
Kevin Lynch is vice-chair of BMO Financial Group. Kathy Sendall is a former senior vice-president of Petro-Canada.
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