Monopolies are something that, as a society, we well understand and try to avoid. But less attention is paid to the polar opposite: the monopsony.
A monopsony refers to being captive to a single buyer – and it is what Canada faces when it comes to most of our energy exports. Like a monopoly, it, too, can come with some unpleasant side effects.
Energy markets in North America are undergoing a fundamental technological change, and this has resulted in Canadians receiving lower prices for our oil and gas products. The consequence is billions of dollars of forgone wealth. Our inability to access other markets has become a severe constraint on the benefits of energy development.
Canada exports about 70 per cent of its oil production and 60 per cent of natural gas production. Essentially all of these exports are destined for the United States, due to a combination of geographical and logistical factors. Both oil and gas move most efficiently by pipeline, but our export-oriented pipeline infrastructure is currently set up to move our products to only one market, the U.S. Midwest.
The solution to this situation is deceptively simple: Build the infrastructure that will give our energy products access to seaports. Once on the ocean, they can potentially go anywhere in the world. In practice, this is proving to be a major challenge. The costs of new pipelines and port infrastructure are substantial, and securing the right of way for them can be very difficult.
We have made the most progress with natural gas. Liquefied natural gas exports from Kitimat, B.C., are likely before the end of the decade. Part of the reason for this is the ongoing shift in Canadian gas production from Alberta to British Columbia, and thus away from the traditional pipeline network. However, with total Canadian production expected to be flat at best, this shift will require decommissioning or repurposing some existing pipeline capacity.
Establishing new oil pipelines is proving more challenging than in the case of natural gas. This is partly because all of the expected increase in Canadian production in the coming years will be sourced from the oil sands, and there are concerns regarding the industry's environmental footprint. However, with oil sands production expected to nearly double by 2020 and triple by 2030, additional export capacity is a necessity. Construction of the much discussed east-to-west Canadian oil pipeline would alleviate the need for refineries in central and eastern Canada to import oil; but that would still only account for about one-quarter of the expected increase in oil sands production.
There are good reasons for diversifying our export markets, beyond the simple need to expand our export capacity. The first is to take advantage of price differentials. Technological changes, such as growing in-situ development in the oil sands and the use of fracking and horizontal drilling to access shale oil and gas, has led to surging North American production, while demand has been little changed.
The result has been North American prices falling below global benchmarks. For example, prices for natural gas in Europe and Asia are currently two to three times North American prices. In the case of oil, Canadian prices relative to global benchmarks have been discounted even more than U.S. prices, due to the fact Canadian oil is competing for pipeline and refining capacity with increased oil production from shale oil in North Dakota. Access to other foreign markets would allow Canadian producers to get better prices for their products, increasing the royalties and income taxes that they pay.
Reducing risk is another benefit associated with diversifying our export markets. Some of these risks are market-related. For example, energy demand is not growing at the same pace in all markets; it is strong in many emerging markets and flat or declining in many developed countries. Gaining access to more markets means more growth opportunities.
As well, having only one buyer exposes Canada and its energy producers to policy risk. Although the United States is our friend and neighbour, we are captive to its policy decisions. The best example of this is the current debate over the construction of the Keystone XL pipeline that would take oil from Alberta to Texas and Louisiana. Another is the attempt in some U.S. jurisdictions to ban the use of petroleum products refined from bitumen. More customers would provide us with more options and bargaining power.
None of us enjoys being forced to buy from a monopoly. Similar constraints apply where there is only one buyer for our products, and that is exactly the situation for most of our energy exports. The price gap between North American and global benchmarks that has opened up in the past two years is a symptom of this problem. It is taking billions away from Canadian corporate profits and government coffers, and could slow the future job growth and income creation from energy development.
Michael Burt is director of Industrial Economic Trends at the Conference Board of Canada