ENERGY RELATIONS
Introduction
The US and Canada have been supporter and challenger, associate and adversary, foe and friend- throughout their history. As a result, the two nations have experienced durations of conflict with one country’s national interests dictating actions that caused adverse effects on the other (Behiels and Stuart 2010; Andreas 2013). Since the 1980s, however, the two nations have increased their energy relations through integration and cooperation (Hooper and Newlands 2012). As such, significant issues have often been resolved through negotiated compromise. Nonetheless, some US-Canada trade relations have been unsuccessful. For example, although the two nations are widely known for having the “longest undefended border in the world,” they have engaged “in major commercial disputes requiring adjudication at international levels” (Prince 2004, 1). Consequently, the two countries’ energy relationship has evolved slowly over the last few decades. This study on Canada-US relations investigates the energy interactions between the two nations and offers recommendations for strengthening the relationship. The review considers the major energy sectors: electricity; natural gas; and oil. Additionally, nuclear energy and coal are discussed due to their significance in ensuring an adequate supply of energy in the two countries (Prince 2004). Lastly, the paper examines general and specific issues in the energy relations between the two nations and outlines various approaches to addressing the issues.
Energy Sectors
Crude Oil
Different countries trade in crude oil in global markets that create overall prices. Typically, Canada and the US import nearly 50% of their crude oil requirements (Prince 2004). Table 1 shows that Canada was the largest supplier of crude oil to the US in 2003 with the oil supply accounting for almost fifteen percent of the US imports.
In the bilateral oil trade between the US and Canada, the global market establishes the price with nearly all crude oil being sold on temporary contracts. Moreover, the two nations “are part of the 26-member International Energy Program,” which requires the sharing of available supplies in the event of significant supply disruptions (Prince 2004, 3). At present, the production of typical crude oil continues to decline in the US and Canada. Canada, however, is attempting to offset the decline through offshore development, as well as the utilization of oil sands (Natural Resources Canada 2015).
In 2009, petroleum products and crude oil from Canada “represented 21% of U.S. crude oil imports, at nearly 2.5 million barrels per day, or 13% of total U.S. oil consumption” (Government of Canada 2011). Globally, Canada is currently the sixth largest producer of oil with its daily oil output being expected to increase significantly due to oil sand development. Moreover, Canada’s reserves are considered as safe and reliable sources of oil in North America. The country’s oil reserves are also the second-largest in the world, after the reserves in Saudi Arabia, and estimated “at 174 billion barrels, 170 billion of which are in the oil sands” (Government of Canada 2011). In addition to oil sands, Canada continues to develop petroleum in many areas of the country, including the offshore region of the Atlantic. Furthermore, ongoing technological advancements are expected to minimize environmental impacts and costs and, hence, increase the availability of more oil reserves in Canada. Typically, US companies play a significant role in investing, producing, and developing new oil technologies in Canada. Similarly, oil companies in Canada invest heavily in the petroleum industry of the United States and, thus, create job opportunities and provide income for many US citizens. As the export of oil from Canada increases, the US continues to expand its refineries and pipelines, which increases investment and creates more jobs in the US. Unfortunately, the production of oil sands is associated with significant environmental impacts (Kelly et al. 2010). The Canadian oil industry, therefore, continues to seek effective methods of reducing the emission of greenhouse gasses from the production of oil sands. Such efforts have reduced greenhouse gas emission “by 29% from 1990 to 2008” “on a per barrel basis” (Government of Canada 2011). A recent introduction of strict regulatory measures and advanced technologies are expected to reduce the emissions further. Most of the technologies being developed are aimed at decreasing the effects of oil sand processing and extraction, as well as focusing on carbon sequestration and capture. The US and Canada continue to collaborate in the effort to achieve emission reduction goals through various projects. For example, Weyburn-Midale, which “is the largest carbon dioxide (CO2) capture and storage project in the world,” has sequestered almost ten million tons of carbon dioxide since its launch in 2000 (Government of Canada 2011).
Natural Gas
The trade in natural gas occurs in the market of North America, which fixes prices throughout the continent. Nonetheless, there is an increase in the potential for LNG trade’s expansion, which might contribute to the determination of global prices (Prince 2004). Natural gas fuel is more suitable than many other sources of fuel because it emits relatively less greenhouse gasses. As a result, the fuel is associated with higher prices and tighter markets that might last for a considerable duration. Furthermore, it “parallels higher prices in world oil markets and holds implications for economic activity” (Prince 2004, 3).
According to the Government of Canada (2011), “Canada is the third-largest natural gas producer in the world, producing 5.6 trillion cubic feet per year.” Also, the country is the second-largest natural gas exporter in the world. In 2009, the nation “provided 87% of all U.S. natural gas imports, representing 12% of U.S. consumption” (Government of Canada 2011). Primarily, natural gas exports from Canada are directed to the Pacific Northwest, California, Rocky Mountains, Midwest, and the Northeastern region of the US. Canada invests continually in the exploration of its natural gas resources, which “are estimated at 58 trillion cubic feet” (Government of Canada 2011). Nevertheless, the identified reserves are insignificant when compared to the estimated number of unidentified reserves in the country. Recently, Canada has made plans to initiate pipeline projects in Mackenzie Delta, which will allow the extraction of natural gas in the Arctic region. The US and Canada have established well-regulated, efficient, and open markets based on cooperative policies that promote investments in natural gas and strengthen energy security in North America. Furthermore, the Government of Canada (2011) noted that prospects for a longer-term stable supply of natural gas were changing. For instance, the discovery of shale gas has the potential to increase the production of natural gas in North America significantly. Therefore, Canada’s interest in the production of shale gas is growing rapidly, especially “in the Horn River and Montney Basins in northeast British Columbia” (Government of Canada 2011). In-place resources of natural gas like methane and tight gas, as well as shale gas (Brown and Yucel 2013), are estimated at “several thousand trillion cubic feet” (Government of Canada 2011).
Electricity
The trade in electricity is carried out internationally and inter-provincially through the North American Grid, which is a noteworthy demonstration of joint governance. The operation of the grid is managed by “the North American Reliability Council (NERC),” which is a nongovernmental organization with its members comprising the private sector, Mexico’s electricity regulators, and Canadian provinces (Prince 2004, 3). The integrated grid shared by the US and Canada supplies nearly all of the imports in the two countries. Canada supplies electricity to California, Pacific Northwest, Upper Midwest, New York, and New England (Government of Canada 2011). Furthermore, Canada is considered as one of the largest hydroelectricity producers in the world, producing nearly thirteen percent of the global hydroelectric output. Estimates indicate that hydroelectricity accounts for about fifty-nine percent of the country’s total electricity output, which is “over three times the global average” (Government of Canada 2011). Since seventy-seven percent of the electricity generated in Canada does not cause greenhouse gas emissions, the country’s electricity ensures lasting energy security in North America and addresses the collective challenges of climate change.
Nuclear and Coal
Nuclear and coal are valuable energy sources that have the potential to meet the needs of the US and Canada. However, the two sources have been subjected to criticism due to their potential for causing adverse environmental impacts. As such, some groups have opposed their utilization arguing that the resources cannot address future energy needs. However, such views are considered impractical and shortsighted because nuclear and coal are extremely cost effective when used in the appropriate configurations (Prince 2004). Additionally, the use of coal fuel may be enhanced by developing variants of coal and employing technical enhancements aimed at minimizing emissions. The critics of nuclear energy often cite possible proliferation, waste storage, safety, and cost as the basis for their arguments. Although such concerns are genuine, researchers are working to improve the extraction of nuclear energy in order to allay concerns regarding issues such as safety and waste disposal. Nuclear is a legitimate energy source in North America because it is associated with “significant emission-based advantages” and a “low full cycle cost” in comparison to other traditional fuels (Prince 2004).
“Canada has the world’s largest known high-grade uranium deposits and was the world’s leading producer of uranium in 2008” with the production accounting for approximately 20% of the total mine production in the world (Government of Canada 2011). Studies have demonstrated that Canada’s uranium has high energy potential when compared to the country’s annual natural gas and oil production (World Nuclear Association 2016). Moreover, Canada supplies nearly 33% “of the uranium used in U.S. nuclear power plants” and, hence, provides over five percent of the electricity supply in the US (Government of Canada 2011). In the absence of nuclear power, the emission of greenhouse gasses in the US and Canada would increase annually by about ten percent.
Issues in the US-Canada Relations
Typical Issues
Energy issues between Canada and the US often extend beyond trading activities. Significant concerns emerge from the plans of each nation to address various needs within its borders (Prince 2004). One fundamental issue that affects the US-Canada relations is the absence of energy sources in locations “where they are most needed in end-use” (Prince 2004, 4). Such resources require transport and transformation processes, which involve infrastructure and land issues. In turn, the problems have to be resolved over a period and, thus, cause delays and shortages. Consequently, the problems require the market’s demand side to initiate various adjustments. For instance, the supply of natural gas from Alaska and Northern Canada has the potential to maintain a long-term continental balance (Reynolds 2006; Whitney and Behrens 2010), but pipeline delays may cause significant market imbalances. In addition, the depletion of traditional fossil fuels might eventually generate real shortages (Prince 2004). Although such eventual shortages may not occur in the next several decades, the start of the decline may occur rapidly. Therefore, there is a need for adequate planning to address the eventual decline of fossil fuels.
Different analyzes have suggested that the prices of energy may reach a higher level than realized in the past decades. Also, the tightening balance in supply versus demand and the associated higher prices have the potential to interfere with economic stability in the US and Canada (Prince 2004). Therefore, the two nations should recognize the changing environment and develop domestic strategies, which can be executed cooperatively to address prevailing and future challenges. Although the Kyoto Protocol has several benefits, research suggests that the procedure may influence the future price or supply of the fossil fuels and, hence, exacerbate the prevailing market imbalance (Prince 2004). Nonetheless, the Protocol may also cause indirect effects due to the uncertainty of Canada’s capacity to realize the Protocol’s objectives. Moreover, the indecisiveness might inhibit various investment projects. For example, if meeting such objectives would increase the costs of supplying Canadian energy to domestic markets, competitiveness in the markets would deteriorate in relation to trading partners like the US, which have not ratified the Protocol (Prince 2004).
Specific Issues
The productive oil sands resources in Canada can contribute significantly to future oil supplies in North America (Fouquet 2013). Nevertheless, the development of such resources would require substantial investments in infrastructure, involving pipelines and specialized refining ability, to address the increase in the variants of heavier crude oil. The refining capacity would bring benefits to Canada by facilitating the addition of value to Canadian exports. An absence of a clear policy direction, however, would allow commercial considerations like financing to influence the development of oil sands. The current dwindling natural gas and water resources (Yanez-Arancibia, Davalos-Sotelo and Day 2014) create further challenges for the development of oil sands. For instance, although the supply of natural gas is associated with various emission-related benefits, the presence of various “land-based environmental concerns that can generate opposition to its development” is a significant challenge (Prince 2004, 5).
Recommendations
Global markets for liquid fuels like petroleum are experiencing dynamic changes in demand and supply (Energy Information Administration (EIA) 2014). Furthermore, after decades of considerable energy balance, the world might be entering a period of occasional shortages (Prince 2004). Therefore, efforts aimed at analyzing the issues of resource shortage should be intensified. Additionally, policies and strategies that address supply and demand issues in the energy sector should be developed and implemented (Prince 2004). Although regulators in Canada and the US have been communication and working cooperatively in the recent years, they should address challenges in joint planning, especially in hydroelectricity markets, to maintain an effective and productive cross-border relationship. Moreover, interstate and interprovincial trade in electricity market should be ameliorated to provide benefits to the US and Canada by developing stronger markets and technical links between different provinces.
The Canadian and the US governments should resist the pressure to react to issues in energy markets by subsidizing energy prices because such responses have the potential to interfere with market signals, which often restore the balance in energy markets. In the long-term, the importance of addressing energy needs while decreasing environmental impacts suggests that Canada and the US should expand their planning horizons. The approach requires acknowledging the possible future decline in fossil fuels and the need to develop alternative sources of energy, particularly geothermal, wind, tidal, and solar energy (Prince 2004). Finally, efficiency enhancements in employing energy to minimize demand without the undue lowering of living standards will help to strengthen the US-Canada energy relations.
Conclusion
Although the US and Canada have experienced durations of conflict in the past, the two nations have intensified their energy relations in the recent years through integration and cooperation. The present study has identified a strong bilateral relationship in the electricity, natural gas, and crude oil sectors. Additionally, the investigation has noted that nuclear energy and coal have the potential to ensure an adequate supply of energy in the two countries. Nevertheless, several challenges continue to affect their energy relations, particular due to the concerns that emerge from each country’s plans to meet its energy needs within its borders. The possible future problem of shortages of fossil fuels suggests that the two nations should employ joint policies and strategies aimed at addressing the supply and demand issues in the energy sector. Although Canada and the US continue to favor a growing energy partnership, ensuring a mutually beneficial relationship will probably remain a significant oversight challenge during the next decades.
References
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