Free-markets trump politics

obama nopePresident Barack Obama announced this past Friday the rejection of the Keystone XL pipeline proposal, saying the project “would not serve the interests of the United States.” The president cited concerns about the impact on the environment and a political climate that over-hyped the pipeline’s benefit.

However, history shows that free markets have an interesting way of defying politicians. Case in point: In spite of the Obama administration’s multi-year dilly-dallying on a decision on Keystone XL pipeline it clearly had not stopped Canadian crude from finding a way to get to market.

You have to admire the speed and ingenuity with which the private sector manages to work around the whims of politicians and the apparatchiks who serve them. No rule-making bureaucrat could hope to stand a chance as long as free markets continue to prevail!

With production from prolific U.S. shale plays crowding out Canadian crude from key pipelines and no Keystone XL to alleviate the bottleneck, oil producers began shipping crude by rail, barge and even truck.

Unfortunately, not only are these methods slower and costlier than pipeline transportation, they can clearly be more dangerous to human lives. Just ask the families of the 47 people killed in the Lac-Megantic tragedy of 2013. Nevertheless, the “rolling pipeline” (trains) keeps on rolling. Now that crude oil production in the U.S. shale plays is finally on the decline, foreign oil is suddenly in greater demand in the USA. In fact, after plunging during the first half of the year, exports of Canadian crude to the U.S. hit a new all-time high as of August, 2015 at 3.4 million barrels per day, according to data from the U.S. Department of Energy.

Even before crude oil prices collapsed, Canada’s share of U.S. oil imports began to rise, as demand for costlier oil from overseas declined in the wake of the Shale Revolution. Canada’s lower exchange rate has also given a big boost to U.S. demand for its energy products, both in terms of volume and market share.

The currencies began to diverge in mid-2013, as it became apparent that each country’s central bank was headed in an opposite direction on interest rates. Since then, the Canadian dollar has dropped nearly 21%. That’s a far cry from the exhilarating days less than three years ago when the loonie traded above parity with the greenback and the staff in our Welland ON debt collection centre enjoyed beer and wings at a discount stateside over in Buffalo. But the devaluation of the loonie clearly helped Canadian crude grow from 30% of total U.S. oil imports in mid-2013 to 45% as of the end of August, 2015 despite the fact that total oil imports are only 1.3% lower than they were at the beginning of this period.

Equally impressive, the volume of U.S. imports of Canadian crude has jumped nearly 46% over that same period, outpacing Canada’s production growth of 22%.

As such, three things are clear. Though Canada desperately needs to develop new export markets for its energy products, it’s still managed to steal U.S. market share away from foreign competitors. And while it takes time for a lower exchange rate to pump up an economy, the turmoil in Canada’s energy sector would obviously be even worse without it. And, most importantly, for you worry warts out there, keep the faith that free markets will continue to trump the self-aggrandizing political intelligentsia over the long run.

As a collection agency with offices in Edmonton, Calgary and the GTA we are watching with keen interest the unfolding of events with respect to these phenomenon and their impact (or lack thereof) on Canadian credit markets.