Greater Oil and Gas Export Capacity Will Boost Canadian Dollar – And Productivity

Canada’s productivity performance has been dismal, having not increased over the last nearly ten years. Economists calculate productivity as the value of output divided by hours worked to generate that […]
Published on February 13, 2024

Canada’s productivity performance has been dismal, having not increased over the last nearly ten years. Economists calculate productivity as the value of output divided by hours worked to generate that output.  However, the numerator, being the value of the goods and services produced, has been either neglected, or, when it is actually addressed, is looked at from the perspective of new, ‘high tech’ products and services (information technology, artificial intelligence, or advanced equipment, materials and devices).  While all these industries are important, other sectors boost value, too.

Foremost among those sectors is energy – where Canada has outstanding competitive advantages, but still does not get full value for its output.  Canada’s oil exports now go entirely to the United States, mostly via pipelines from Alberta and Saskatchewan, with a small amount sent by ship from the Vancouver area to U.S. West Coast customers.   All Canadian natural gas exports go entirely to the U.S., which already has a surplus.

The situation severely harms Canadian producers’ bargaining power, which causes them to experience severe discounts on natural gas and oil (whether heavy oil sands, Western Canada Select, ‘bitumen’; or conventional crude oil).  Fortunately, the situation will change radically, either next year, or, possibly, later this year.

The reason: Canada LNG, the first of possibly several West Coast liquefied natural gas liquefaction export terminals, should soon commence shipments to foreign buyers (South Korean, Japanese utilities, and others in East Asia).  The export capacity of the Kitimat, BC, facility is 1.8 billion cubic feet daily, or 1.8 million Gigajoules, ‘GJ’.

Natural gas now sells for about $2.50/GJ Canadian in Alberta, whereas East Asian recent prices were US$16.70:  about CAD$22.25.  (It costs several dollars to liquify, load, transport and re-gasify at destination each GJ.)  Every dollar of after-cost price differential flows directly to producers, and Canada’s balance of payments.  The balance of payments determines our loonie’s value, and, thus, Canada’s standard of living (also, to some extent, inflation).

It may be overly optimistic to think that Canadian producers could reap CAD$10 in gross profit per GJ, let alone the full almost-$20 price differential.  However, even if it is just $5 per GJ, that generates $90 million per day, or almost $33 billion per year.  As total exports were $596.9 billion in 2022, this would constitute an increase of about 5.5%.  This amounts to roughly $1,610 per person in Canada’s current 20.5 million-strong labour force – a big productivity increase for ‘little’ extra work (as everything will have already been built).

Yet, that is not all.  There is also the TransMountain, ‘TMX’, pipeline expansion, scheduled for completion this year.   Its extra capacity of 590,000 barrels per day is all slated to be exported.  If ‘just’ $10 extra per barrel is garnered (the U.S. heavy oil differential exceeds that, typically), that would bring $5.9 million more per day:  $2.15 billion annually.

This would also contribute to a better balance of payments (perhaps becoming positive once more), a higher loonie, higher productivity, lower inflation, and a higher standard of living.  Australia, which now outperforms Canada, does not interfere with its own massive LNG exports.  If Canadian politicians can restrain themselves from blocking more oil or gas pipelines and LNG export terminals, a bright future awaits.

 

Ian Madsen is the Senior Policy Analyst at the Frontier Centre for Public Policy

 

Watch Ian Madsen on Frontier Live on X here.

 

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