Canada in 2013: It’s all about the oil

By Jonathan Kay, Special to CNN

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Editor’s note: Jonathan Kay is the Managing Editor for Comment at Canada’s National Post newspaper and a fellow at the Washington, D.C.-based Foundation for Defense of Democracies. Follow him @jonkay. The views expressed are his own.

Canada is in a fortunate position relative to other developed Western nations. Our government is stable. Our budget deficit is small. Our real estate market is healthy (if somewhat overheated). And unemployment is relatively low. Only the occasional flourish of Quebec separatism keeps things lively in the Great White North. The biggest challenge my country will face in 2013 – and for many years after that – will be the problem of plenty. Specifically, how will Canada manage its large and growing oil wealth?

Canada currently produces just over 3 million barrels of oil per day (b/d), making us the world’s 7^th largest producer, and the single largest supplier of oil imports to the U.S. market. Thanks to the ongoing expansion of Alberta's oil sands, production is expected to more than double by 2030, to 6.2-million b/d, transforming Canadian into an energy superpower.

But there is a problem: The vast majority of the country’s oil wealth is landlocked in northern Alberta. And the existing pipeline network, which connects the large Canadian hubs at Edmonton and Hardisty, Alberta to the main American terminals in Oklahoma and Illinois, is inadequate. Half of America’s 18 million b/d refining capacity sits on or near the Gulf Coast. But barely any Canadian oil gets there (in part because of America's own oil pipeline bottleneck at Cushing, Oklahoma).

For this reason, in 2013, Canada’s government and oil producers will be making a big push for U.S. President Barack Obama to reconsider the Keystone XL pipeline project, which could bring 830,000 b/d from Hardisty, Alberta to Steele City, Nebraska.

Perhaps more important for Canadian producers, in the long run, is the massive and growing Asian market.

China’s net oil imports are projected to double between now and 2030, from 5.7 million to more than 12 million b/d. India's net imports, likewise, will grow from about 3 million to about 6 million b/d. Yet despite the spider web of pipelines that cover the North American Midwest, there is just a single oil route to the west coast from Alberta – the 300,000 b/d Kinder Morgan Trans Mountain Pipeline, leading to Vancouver and Puget Sound.

And so an important challenge for Canada in 2013 and beyond will be to move forward on pipeline projects that expand our access to Asian markets, including both a possible expansion of the Trans Mountain pipeline (bringing capacity up to 750,000 b/d), and a completely new 36" diameter, 730-mile pipeline called the Enbridge Northern Gateway, which eventually could transport as much as 850,000 b/d of diluted Alberta bitumen to a new marine terminal near Kitimat, British Columbia, for sale to Asian markets.

Construction of the Northern Gateway pipeline would provide a huge boost to the Canadian oil industry. But its chances of going ahead in its currently planned form in 2013 are very slim, for a variety of very all-too Canadian reasons – including bickering involving the federal and British Columbia government over revenues, massive opposition from aboriginal bands, and an extremely effective anti-pipeline campaign mounted by British Columbia's powerful environmental lobby. In fact, many analysts believe the pipeline will never get built, leaving Canadian oil producers largely hostage to the American energy market.

Stresses are appearing in Canadian public life not only over the question of what to do with our oil, but also over what to do with the money we earn from it.

Thanks to Canada’s “equalization” policy, billions of dollars are shuttled (indirectly) from the country’s richest provinces to its poorest on an annual basis. In recent years, this has meant that oil-rich Alberta (per capita GDP = about $78,000) generously subsidizes the welfare-state policies of an out-at-the-elbows Quebec (per capita GDP = about $43,000). This has created no small measure of rancor in the country, especially because Quebec's left-wing, environmentalist politicians have made a habit of attacking Alberta’s oil industry for its pollution and contribution to global warming, essentially biting the hand that feeds them.

At one point in 2012, Canada’s leading opposition politician, Thomas Mulcair (who is from Quebec), even declared that the oil sands were giving Canada a case of what economists call “Dutch Disease,” whereby high priced commodity exports cause the Canadian dollar to appreciate, thereby rendering our manufacturing industries uncompetitive in global markets. The remark was front page news for days, and continues to stick in the craw of many Albertans.

All in all, managing the oil file will be Canada's biggest challenge in 2013. Like a family that has won the lottery, we Canadians are delighted by our newfound wealth. But turning it into useful income has become unexpectedly problematic, due to our geography, fractured political landscape, troubled historical relationship with First Nations, and environmental focus. The fight between our squabbling regions and constituencies over the best way to proceed has only just begun.