Thank you very much.
Let me, first of all, thank you for inviting me to speak on the issue of what I'll call energy market growth and diversification. It's certainly a pleasure for me to be before this committee again and to have an opportunity to discuss a number of issues that are on your mind. So I'll just make a few brief remarks for that reason.
It's not a surprise to you that currently Canada's oil and gas is exported primarily to the United States. It is my belief that there are significant economic and geopolitical gains to Canada if we both extend and diversify our exports to other markets besides the United States. My purpose today is to explain those benefits to Canada and to argue that pipeline capacity must be improved if we are to take advantage of these immense benefits.
Let me start with the economic case. As is well known, economic growth has emerged in many Asian, Latin American, and African countries, with less growth coming from Western economies. Even on a longer run basis, it is viewed that most energy demand will come from the emerging economies and less so from North America. It is in the Canadian interest to expand our energy production to meet international demand.
The economic case for energy market growth and diversification is clear-cut and supported by several credible economic studies. These studies have suggested the following aggregate benefits.
First, additional pipeline capacity of 700,000 barrels per day, if built, would increase GDP by over $100 billion from 2016 to 2030, due to the expansion of pipelines to the United States, as well as by reducing discounted oil prices. This is work done by my colleague Professor Michael Moore at the School of Public Policy at the University of Calgary. In the same study, new capacity of 500,000 barrels per day would increase GDP by $16 billion from 2016 to 2030, with oil sold to the Californian and Asian markets.
Second, overall new oil pipeline capacity of close to 1.2 million barrels per day would increase Canada’s GDP by 1% annually over the period 2016 to 2030. Again, this is from the work done by my colleague Professor Michael Moore.
Third, federal and provincial government revenues would increase by over $25 billion in the next 15 years from the additional pipeline construction and shipment of 1.2 million barrels to the U.S. Gulf Coast, California, and Asia. Again, this is from the work done by Professor Michael Moore.
Fourth, the economic effects of the Northern Gateway would provide $125 billion in net benefits to the Canadian economy during the period 2010 to 2048, as pointed out in the work of Robert Mansell and Wright, due to the expansion of exports and the oil price uplift, with the discounted value ranging from $42 billion, with a 5% discount rate, to $16 billion with a 10% discount rate.
Fifth, the Northern Gateway pipeline project is estimated to increase government revenues by $81 billion over 30 years.
These are exceedingly large numbers associated with energy market expansion. Whether the numbers are off, let's say, plus or minus by as much as 20%, doesn't matter to the substantial economic gain realized from energy expansion. Add natural gas expansion, and the numbers become even bigger.
It would be a major loss to the Canadian economy, investment, jobs, and government revenue if pipeline expansion does not take place. Professor Michael Moore estimates, in his scenario, that additional pipeline capacity would increase jobs by 650,000 employment years. The additional tax revenues would increase by close to $1.7 billion annually, helping pay for roads, hospitals, and schools.
A number of criticisms on the economic side have been made about pipeline expansion, which I would like to address. The first is that other regions of Canada would not benefit from the growth of oil and natural gas. Yet, studies would suggest otherwise. For example, Professor Moore estimates that Ontario would realize a pick-up in GDP of $3.5 billion in the next 15 years. He also estimates that Quebec would benefit by $777 million.
Generally, typical studies tend to use an analysis that's based on input-output tables of the Canadian economy. With growth in one part of the economy, it feeds through other parts of the economy through more demand for products and services. Also, governments receive more revenue from taxing goods and services, workers, and profits. The federal government itself would receive over 40% of the revenue from expansion.
I believe that such studies likely underestimate the gains to the rest of the economy from pipeline expansion. The reason is that they do not account for changes in the prices of products and inputs. The growth in the west arising from more energy production pushes up wages and prices in those regions. Other parts of Canada become more competitive, resulting in a shift of production to cheaper jurisdictions. This in turn will push up real wages and incomes elsewhere. This is partly offset by the rising exchange rate, which will affect export-intensive industries; but overall the Canadian economy is richer, in terms of its purchasing power, to buy international commodities.
Another issue is with respect to the social costs of energy production, including environmental costs. Pricing these costs, such as a cap-and-trade regulatory system or an emissions tax, rather than limiting selected business activities, best deals with these issues. These pricing issues are tremendously complicated, as in the case of climate change, which relies on international coordination, not just on one country.
As a recent U.S. energy department study shows, carbon dioxide emission increases in China, primarily due to coal production, have swamped reductions in the United States, Canada, and Europe during the years 2005 to 2011.
Let me now turn briefly to the geopolitical case. As I've argued in many earlier writings, there is another element to market diversification that goes beyond the economic case: improving our bargaining position relative to the United States. Canada, being one-tenth the size of the U.S. economy, simply does not have that much leverage when it lacks alternative markets for our products.
For example, we've had years of difficult negotiations with the United States with respect to softwood lumber exports. This is now changing due to market diversification. Canadian exports of forest products to the United States have dropped from nearly 80% in 2001 to 60% in 2011, with growing demand in Asia. Our ability to export to other markets strengthens our hands in negotiations.
While our relationship with the United States is critical, given our economic and cultural ties, at times it is stressed, whether a result of trade restrictions, Buy American regulations, or border levies. In the case of energy, the United States is increasing its own fossil fuel production and importing relatively expensive offshore oil and cheap Canadian oil. With pipeline capacity expanded from Cushing, Oklahoma, to the Gulf Coast, the U.S. would be able to substitute cheaper North American oil for more expensive and less reliable Venezuelan and Mexican oil, which is subject to stoppages. Without alternative energy markets, we begin at a disadvantage in negotiating better terms for our energy exports.
Taking this a step higher, there's a significant advantage to market diversification in terms of not just economics but also geopolitics. If the United States prefers our oil to that of less stable countries, we can command a premium, whether taken in higher prices or in some indirect way. This, however, will arise only if we have a credible threat, which will only come from having other markets to trade with.
Thank you.
