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The Keystone pipeline and 'oil disease'

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Finance Minister Jim Flaherty somewhat undiplomatically tore a strip off the United States last week after the Obama administration decided to put the Keystone pipeline into the deep freeze. And then he made a direct geo-political threat aimed at America, his party's political model. The Keystone pipeline delay, Mr. Flaherty said, "may mean we may have to move quickly to ensure we can sell our oil to Asia through British Columbia."

In other words, if you won't buy our raw bitumen, we'll sell it to China.

It is a little odd, this business of a Canadian neo-con minister, at the heart of the Harper government, threatening the United States with a closer economic relationship with Communist China. There's going to be a little splainin' to do at the Cato Institute and the American Enterprise Institute. But it does give us the flavour of "oil disease" -- of how the vast revenues associated with this resource can pervert even the geopolitical principles of conservative ideologues. There are people in that industry (and their poodles in government) who will do anything to infinitely expand their sales and their profits. Including, apparently, threatening Uncle Sam with a tighter embrace of Mao's heirs.

There is an alternative approach available, one that turns on four words: pacing; value-added; price; and transition.

Pacing: The Keystone pipeline only made sense as a business proposition -- it never made sense as an environmental one -- if production in the oil sands were to be substantially increased. Keystone wasn't necessary to transport current or even somewhat increased oil-sands production. When filled, it would have doubled bitumen exports to the United States. The pipeline's cancellation is an opportunity to reconsider the pacing of development in the oil sands. And, specifically, to move to a much more considered, deliberate, and unsubsidized pace.

Value-added: The cancellation of the keystone pipeline is an opportunity to ask fundamental questions about its purpose. As in: Why exactly are we proposing to ship raw bitumen to a Texas refinery complex for it to be processed there? As many credible voices have been arguing with increasing force and conviction, Canada is throwing away its economic future when we anchor our economy, our currency and our public revenues on the export of raw unprocessed resources that can be processed here.

Pricing: The cancellation of the Keystone pipeline is an opportunity to revisit an important issue the Government of Alberta attempted to tackle a few years ago, until defeated by "oil disease" -- the price at which we are selling this resource. A decision to proceed at a much more deliberate pace creates an opportunity to price our resources, through royalties, at their real value.

Transition: And finally, doing all of this gives us an opportunity to reconsider what we are doing with one-time fossil fuel revenues. For geopolitical, environmental and economic purposes, we would do well to flow a lot more one-time royalty revenue into transition funds, to invest in a new Western Canadian economy that is not dependent on the mining of raw bitumen. One way or another, the world will soon act to dramatically reduce carbon emissions, and so will Canada. If the best hockey players play where the puck is going to be, then the Western Canadian energy industry -- and our economy as a whole -- need to do the same.

Mr. Flaherty may counter that "transition funds" (on, for example, the Norwegian model) smack of socialism. But given his statements this week, he shouldn't have a problem with that.

A final note. Threats aren't generally a good tool in diplomacy, but if you're going to make one, it needs to be credible. Mr. Flaherty's route to bring bitumen to China is itself -- how shall we put this -- likely a pipe dream. The proposed "Northern Gateway" pipeline, which would bring bitumen across the Rockies to Kitimat, would have to cross the territories of dozens of first nations, many of whom have never signed a treaty and most of whom are dead set against the project. Over 4,000 Canadians have signed up to testify during hearings about the "Northern Gateway" scheduled for next year, apparently the largest number to ask to speak at such a hearing in our history. There will be no oil sands bitumen flowing to China any time soon. I bet the U.S. government took note of that when its ambassador cabled Mr. Flaherty's comments home, as we'll eventually read in WikiLeaks or one of its successors.

This article was first published in The Globe and Mail.

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