Thomas Gunton of Simon Fraser University’s Resource and Environmental Planning Program had a piece in yesterday’s Globe and Mail raising the question if the statement of support for the Keystone XL pipeline and the approval of two other pipelines was moving Canada to a situation of surplus capacity when it comes to pipelines? Gunton’s answer was yes.
According to Gunton, the capacity of the projects approved by the federal government (namely, Trans Mountain, Enbridge Line 3 and Keystone XL) and under review (Energy East) is 2.9 million barrels per day, which would expand Canada’s export pipeline capacity to 7.1 million barrels per day – 7.9 million including rail.
On the other hand, demand for capacity was much more uncertain in light of current conditions in oil markets. The most recent forecast by the Canadian Association of Petroleum Producers (CAPP) for Western Canadian oil supply is 4.9 million barrels per day for 2025 and 5.5 million for 2030 meaning means if all four projects are built, there would be a surplus pipeline capacity.
Gunton concludes: “By evaluating each project separately without assessing the overall supply and demand for oil transportation, the NEB and the Canadian government may have created the conditions for a costly mistake of unprecedented proportions. To avoid this, the government needs to evaluate all proposed projects from a social, economic and environmental perspective to determine which mix of projects are required and best meet Canada’s public interest.”
I am not an expert in energy economics or pipelines but there is one thing I want to quibble with here and that is that the federal government may be about to embark on a mistake of unprecedented proportions. This is not the first time the federal government has gone about helping create surplus infrastructure capacity. The best example from our economic history is the transcontinental railway age.
As part of a nation-building project to build the transportation infrastructure for an east-west economic axis, Canada’s federal government subsidized the construction of the Canadian Pacific Railway, which was completed in 1885. Given the sparse population west of Lake Superior at the time, the need for a subsidy for a large indivisible capital project is not in question but the size of the subsidy has been subject to debate. The federal government provided the CPR with cash ($25 million), land grants (25 million acres), tax concessions, rights-of-way, and a 20-year prohibition (monopoly clause) on the construction of competing lines on the prairies that might feed to US railways.
As the wheat boom picked up steam after the 1890s, the demand for rail services increased and new transcontinental rail projects emerged. While the federal government early on tried to combine the Grand Trunk and Canadian Northern projects into a plan that would see one serve primarily the east and the other the west, in the end both went forth as separate projects with the Grand Trunk Pacific-National Transcontinental completing its lines in 1913-1914 and the Canadian Northern in 1915 – just in time for the end of the wheat boom and the drying up of migrant settlers to the west.
Both of these additional transcontinental railways also received federal government assistance – indeed the federal government built the eastern section of the Grand Trunk (the National Transcontinental which was completed in 1913) ostensibly to lease back rent-free in the period immediately after completion. As well, the federal government guaranteed bonds for both the Grand Trunk Pacific and Canadian Northern.
Along with the Canadian Pacific Railway, there were ultimately three other transcontinental rail projects after 1900 – the Grand Trunk Pacific, the National Transcontinental (which was the eastern section of the Grand Trunk) and Canadian Northern. In the end, Canada ended up with three complete transcontinental rail lines when at most two would probably have sufficed. This proliferation of railway building in light of the view that Canada’s hour had struck and every town between Toronto and Vancouver was going to be the Chicago of the North led to massive overcapacity.
As a result of World War I, railway traffic declined and the new transcontinental lines immediately began to experience financial difficulty and requested and obtained government assistance. In the end, Canadian Northern was taken over by the government in 1917 and the Grand Trunk Pacific-National Transcontinental in 1920 and Canadian National created in 1923. The rest as they say is history. We have seen this kind of stuff before.