Like it or not, crude oil is the biggest reason for Canada’s prosperity

The oil industry looms large in the Canadian economy and, in many ways, pays the rent in Canada. Yet many Canadians appear unaware of how critically important the oil industry is to the national economy, a fact often lost in the debate over the Trans Mountain pipeline expansion.

Canada is a trading nation. We owe our economic prosperity and relatively high per-capita income to trade — and crude oil dominates that trade. In 2014, before the oil-price downturn, crude oil alone generated a $70-billion trade surplus for Canada — excluding smaller surpluses in refined petroleum products and natural gas — far outstripping any other export category (the closest is metals and minerals) and helping to offset large, chronic deficits in autos and parts, industrial machinery, electronic goods and consumer products.

Even at the bottom of the oil-price correction in 2016, crude oil remained the largest positive contributor to Canada’s merchandise trade, generating a $33-billion surplus. In 2017, net oil exports increased again to $46 billion and will likely climb to over $50 billion this year, alongside the recent recovery in West Texas Intermediate (WTI) oil prices to the $70 mark.

Canada’s overall merchandise-trade balance shifted from surplus to deficit in 2015 and has remained in negative territory through 2017. While the deficit decreased slightly to $23.3 billion last year, aided by gains in large-volume resource-based exports (oil, agri-food, forest products and natural gas), the deficits in consumer and industrial electronic goods ($38.5 billion), autos and parts ($18.8 billion) and consumer goods ($53.6 billion) actually worsened. Net imports of industrial equipment remained high at $19.5 billion.

Oil industry tax and royalty revenues have also strengthened the overall fiscal position of governments across Canada, helping to fund social services. In 2016, the latest year for which data is available, Alberta payments to Ottawa were around $22 billion more than it received, amounting to over $5,100 per capita, helping to fund equalization payments to Quebec, the Maritime provinces and Manitoba. Alberta has consistently shared a portion of its resource wealth with the rest of Canada. Per capita, Alberta’s net federal payments are five times bigger than any other province.

The contribution of the oil industry could have been even greater — much greater — had more export pipeline capability been available, especially to the Canadian West Coast, but also to the United States. While export shipments to Asia are possible the existing Trans Mountain pipeline through the Port of Vancouver, pipeline utilization is tight, limiting overseas volumes. The vast bulk of Canadian oil exports flow to refineries in the U.S. Midwest, the mountain states and the Gulf Coast.

A lack of alternative export outlets for Canadian crude often translates into wide price discounts off WTI oil (the North American reference price) whenever U.S. demand slows seasonally or when there is a significant U.S. refinery outage. Late last year, a service interruption on a key pipeline to the U.S. caused the heavy-oil price discount off WTI to widen to around US$30, much higher than the US$12 justified by the higher cost of processing heavy crude. Discounts on light and medium crudes widened as well.

Expansion of the existing Trans Mountain pipeline would not only shrink that discount, it would also help to alleviate tight market conditions for gasoline in Vancouver. The pipeline already directly supplies 50 per cent of the gasoline consumed in the Lower Mainland, not counting imports of gasoline from Washington State refineries sourcing crude from the pipeline. Motorists in Vancouver are currently paying the highest price at the pump of any major city in North America.

Canada is blessed with the world’s third-largest proven oil reserves, a huge source of national wealth. Expanding the Trans Mountain pipeline would help to maximize the benefits for all Canadians.

Patricia Mohr is an economist and commodity market specialist in Vancouver. She developed the Scotiabank Commodity Price Index, the first of its kind in Canada.