Infrastructure, Politics and Energy Markets

The Obama administration's approval for the construction of the $5.4 million TransCanada Corp. XL pipeline, an extension that would deliver more Alberta crude oil to refineries on the U.S. Gulf Coast, has once again been delayed, as it has several times over the past six years. The State Department said last week it would push forward a decision, until next year at the earliest, an obvious stalling tactic that perhaps has just a bit to do with the upcoming mid-term Congressional elections this November.

In the short term, this is yet another blow to TransCanada Corporation. It's a boost to environmentalists, who, in their belief that oil sands development in Alberta must be stopped, seem quite willing to ignore the geopolitical advantage of enhancing North American energy production, thereby reducing dependence on supply from Mid-East countries. TransCanada's stock sold off, by nearly 4%, immediately after the announcement of this latest delay, but investors are hardly fleeing, perhaps recognizing that the XL investment, while significant, accounts for just a seventh of the $38 billion TransCanada plans to spend on capital projects over the remaining half of this decade.

The argument that halting construction of the XL extension would somehow stop, or at least restrain, both the development of the Canadian oil sands and the ongoing integration of North American energy markets is, simply, laughable. Even the State Department saw this when it released its final environmental assessment report earlier this year. TransCanada Corp., and other Canadian energy companies, are already producing and transporting ever-increasing quantities of Canadian natural gas and heavy crude oil into America via an existing maze of pipelines and rail lines throughout the continent, including those in Mexico. Recent trade data tell a genuinely dramatic, transformational story now well underway: Canada’s exports of crude oil and products hit a record 3.4 million barrels a day in the first quarter of this year – even as surging U.S. domestic oil production reached its highest level in 25 years. Further, while U.S. oil production has jumped almost 50 per cent since the middle of 2011, Canada’s shipments into the U.S. have risen by more than 30 per cent. And here's the offsetting, geopolitical kicker: the Organization of Petroleum Exporting Countries (OPEC) is losing its once-powerful grip on the U.S. energy market, and on American diplomacy -  in the past six years, OPEC’s exports to the United States have declined by nearly 50 per cent. In short, OPEC is being left behind as Canada, and American shale oil, fill the gap.

So, the Obama administration can go on indulging itself, fecklessly throwing around the political football called the XL extension, as much as it feels it must. Let the politics and pandering play out, however blatantly and unproductively. TransCanada Corp. will nonetheless thrive over the next many years, with or without the XL extension. And as long as fundamental energy market forces continue to exert their influence, the foreign policy of the next administration in Washington will be far less constrained by excessive reliance on OPEC oil, and by the concomitant excessive sensitivity to the political vagaries of that region.