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Canada will still pursue trade with China regardless of U.S. energy policies

Posted: June 8, 2012 - 12:04am

BLOOMINGTON, Ind. — Let’s be clear at the outset, the Obama administration’s decision to delay building part of the Keystone XL pipeline has contributed to Canadian public dialogue about the need to seek alternative markets for its oil reserves.

Following the November elections, I believe that construction of the pipeline will go forward regardless of the outcome of the presidential election.

The decision to delay the pipeline was based on a political calculation not to alienate Democratic supporters who identify themselves as environmentalists. However, building the pipeline will provide economic benefits at little or no environmental costs since Canadians will sell their oil regardless and so the eventual decision to proceed with the pipeline is almost inevitable.

So why am I arguing against the notion that U.S. energy policy is forcing Canada to pursue a long-range trading pact with China?

Simply because one should not make the mistake of equating short-term public discussion with long-term public policy. The Canadian government likely knows that the pipeline will be built and a delay of a few months is unlikely to affect long-term Canadian policy.

It is a mistake, however, to believe that long-term Canadian trade and energy policies are driven by current U.S. energy policies. Simply put, the Chinese economy is far too important for Canada to ignore.

In the past Canada found itself in the fortunate position of being the neighbor of the world’s unrivalled economic powerhouse, but that is not the reality we live in today.

While the U.S. economy is still the world’s largest, China is gaining fast and Canadians would be foolish to ignore this fact.

Canadians know full well that crude oil is a commodity that commands a world price no matter where it is sold. If that were the end of the story, then selling to America would be best because transportation and other transactions costs would be lower. That isn’t the end of the story, however.

Under the North American Free Trade Agreement, the sale of Canadian crude oil to the United States cannot be restricted. The sale of crude oil, however, is less profitable than the sale of refined oil.

Many Canadians feel their government negotiated a bad deal under NAFTA because they would like to sell refined, not crude, oil to the U.S. If Canada builds a pipeline over the Rocky Mountains to its west coast it could refine the crude and sell the product to China at a greater profit than selling crude to the United States.

At the same time if Canada establishes itself as a reliable supplier of oil to China and other parts of Asia, it would raise its importance as a trading partner with these nations, which will only become more important in the future.

We all know about the value of portfolio diversification, and with Asia surging while America struggles it is readily apparent to Canadians that diversification in trade is beneficial for them.

Like any sovereign nation Canada will pursue policies that are in its own best interest, and with a rising Asia it is naive to assume that American energy policy is dictating Canada’s choices.

A pipeline over the Rocky Mountains to Canada’s west coast may not be built, but if it isn’t, it will be due to opposition from Canada’s “greens” and skepticism about doing business with Chinese state-owned oil companies, not U.S. energy policies.

It is interesting to note that environmentalists make the same naive assumption about U.S. energy policy dictating Canadian actions. They want to stop Keystone XL because they think by doing so they will slow or stop oil sands — which they label tar sands — development.

This is untrue; Canadians will develop their oils sands regardless. Ironically the U.S., if it chooses not to develop Keystone, will lose a bit of leverage regarding how these reserves are developed.

• Maxwell is a professor and chair of the Department of Business Economics and Public Policy at Indiana University’s Kelley School of Business.

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