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.
Is the federal government subsidizing these pipelines, though? My impression was that the NEB was just giving regulatory approval, which means that the risks of overconstruction are being borne by the private sector. Am I wrong here?
Posted by: Alexis | January 13, 2017 at 09:07 AM
Alexis: You are correct as far as I know. I am not aware of any federal subsidizing of the companies proposing the pipelines. In this case, I think it would be the private sector bearing the risk which makes for a key difference between the transcontinental railway age and the pipeline age. However, am ready to stand corrected.
Posted by: Livio Di Matteo | January 13, 2017 at 10:19 AM
First, Energy East will not go ahead. Too much opposition along the way, especially in Quebec. And now with the opportunity to pursue KXL again, TransCanada will certainly not push too hard on E.East.
Second, even with Federal and BC approvals, Transmountain is far from certain to go ahead. I would peg it around 50% chance. Too much opposition from First Nations and local NIMBY issues.
That said, building TMX, KXL and Line 3 (but not E.East) would not result in over-capacity.
Posted by: Minarchiste | January 13, 2017 at 03:40 PM
Whatever the financing, waste is waste. The US 2000's housing boom was privately financed. It ended up so well.
Posted by: Jacques René Giguère | January 14, 2017 at 11:42 AM
Livio: interesting post. Just one dumb question: "As a result of World War I, railway traffic declined..."
That surprised me. Why would WW1 have caused rail traffic to decline? I would have guessed the opposite.
Posted by: Nick Rowe | January 15, 2017 at 06:33 AM
Nick:
In the short term, before the war effort got fully underway, railway traffic plummeted as a main source of revenue was transporting settlers/migrants to the west. Immigration into Canada dried up during the war.
Posted by: Livio Di Matteo | January 15, 2017 at 11:17 AM
Livio: Ah. That makes sense.
Posted by: Nick Rowe | January 15, 2017 at 05:09 PM
Hallo Nick Rowe
in contrast to your Canadian prejudice about the superior Ordoliberalism and Autobahn at
http://marginalrevolution.com/marginalrevolution/2017/01/important-unsolved-problems-field.html#comment-159578746
The Real performance looks more like that
https://www.youtube.com/watch?v=20NkR3VU5uU
How is your buying power now for real US Dollars by now ?
Posted by: genauer | January 15, 2017 at 08:45 PM
Nick
Freie Fahrt für freie Bürger : - )
https://www.youtube.com/watch?v=vijRI4nA088
at a speed of 300 being passed on the left lane
https://www.youtube.com/watch?v=ORGu20C2-I4
Posted by: genauer | January 15, 2017 at 08:59 PM
The railway building boom of the 19th and early 20th centuries was a widespread phenonomenon that originated in Europe and spread rapidly throughout North and South America, as well as Asia as the "new technology" caught the imagination of investors, governments, communities, travellers and shippers, essentially superseding existing networks of intercity transport as the dominant transport mode for both goods and people. Overbuilding and subsequent railway contractions, government ownership and over-regulation were among the portmanteau of responses. New technology building booms and subsequent collapses are, historically normal and common following the introduction of new and transformative technologies, and we have seen them in the US and British automobile industries, the late 20th century communications "tech wreck", the rise and contraction cell phone manufacturers, and the explosion of entry into US telecommunications post "deregulation" in the US, just to cite a few. They are historically normal.
The oil pipeline industry is a little different. There is not much transformative technology going on here, just a garden variety resource industry restructuring and repricing that is normal with resource industries. Nothing to see here. We don't know where future petroleum sources and supplies will originate, but we know where they need to go. Private capital can deal with this stuff, and the NEP, is a gatekeeper not an investor. Investors will bear the risks, and hopefully, reap the rewards.
Grunton's reflections on over subsidization that may have occurred with the CPR are irrelevant because in the 1870's, neither the government nor investors could know the minimum subsidy to keep investors whole over an unforeseeable long term. The evidence of the later value of the railway to the CPR investors was not information that could be known to anyone at the time when the subsidies where negotiated. The Government of Canada had little choice but to raise the ante until sufficient capital could be raised to ensure the railway was built. Without a railway, Canada as a country would fail, the the individual colonies would fall under the influence of foreign and likely hostile powers.
As for the role in role of the NEB in promoting overcapacity, that is ridiculous. Regulatory bodies cannot and should not be expected to reliably forecast demand, and their record in doing so is poor. A permission to build relieves investors of no risks to their capital, nor does it guarantee overbuilding. Denying permits on the basis of anticipated demand is a guaranteed way to ensure that demand that do arise unforeseen by regulators cannot be met. And such is the situation of most regulated industries - chronic mismatches between capacity and demand, and economicly irrational pricing.
Posted by: Kent Charters | January 18, 2017 at 08:36 AM
I'm not entirely sure I fully buy the premise of the analysis. Isn't part of the problem with oil sands output that it trades at a discount in Cushing, for want of easy access to export ports?
If my understanding is correct, half of the intent behind new pipeline development is to bypass and render obsolete much of the existing pipeline capacity. If the marginal barrel of bitumen is sold in BC rather than Cushing, from the oil producers' standpoint the pipelines have done their job.
Posted by: Majromax | January 18, 2017 at 12:25 PM
Gunton's Article in the Globe was a bit of a stretch. He minimized demand (likely oil production) and maximized potential supply (pipelines) to make his numbers work. While irksome, his analysis is irrelevant because at the end of the day the private sector will make investment decisions with a clear head, and correct numbers, as they own all the risk. Let us all remember that the MacKenzie Pipeline was approved years ago, but never started. In regulatory approval, the Government's role is to be a fair referee, and to allow the consideration of issues not caught by the economics of the situation. We often get into trouble when the Government takes advice from authors like Gunton, and makes economic decisions independent of market forces either to the negative (as promoted here) or positive (as in the subsidized railway boom).
Posted by: illuminati | January 22, 2017 at 02:01 PM