From the US perspective, energy security is a matter of demand, while from the Canadian side it’s a matter of supply.
The words “energy” and “security” resonate a strongly with the average American. Inexhaustible and inexpensive energy have long been core to popular American beliefs about what drives economic growth and standards of living. But the notion of US energy security as ready, affordable supply is deceptively simple. In reality energy security is far more complex. It links economics, the environment and trade policy; it intermingles domestic politics and foreign policy. The reality is that in a highly globalized and interdependent world with geographically diverse demands for and supplies of energy, a unilateral US solution to energy security is an illusion.
US energy security will be shaped as much by the evolution of domestic demand as it will be by supply. Thus, the domestic price of energy to consumers will be a critical factor in shaping US energy security. Will there be convergence between the price expectations of US consumers and energy prices consistent with attracting secure longterm energy supplies and addressing climate change objectives?
As long as the US remains a large net energy importer, its energy security must involve others, both bilaterally and multilaterally. National energy sovereignty has limits.
Besides the domestic factors influencing the US energy debate, the relevant global context is being reshaped by number of “global drivers of change” that are transforming how we should think about the world. These include:
- pervasive globalization that has inter-connected markets for goods, services, capital and labour to an extraordinary degree;
- the economic gravity shift to Asia, which by the end of this decade could account for 50 percent of world GDP and three of the world’s larger economies;
- the great global financial crisis, the first since the 1930s;
- the first synchronized global recession, one that has disproportionally impacted the developed world;
- large, structural fiscal deficits in many advanced economies, some without clear “macroeconomic exit strategies”;
- the unfolding, unsettling but uncertain consequences of climate change; and
- a political environment where coalition, minority or divided governments are prevalent in many advanced countries.
These changes are both cyclical and structural, national and global, within our control and outside it. We appear to be at a pivot point, lurching unsteadily toward a new world order but with little confidence and certainty about the future.
Any discussion of US energy security is conditioned by the basic global energy facts of supply and demand.
According to the International Energy Agency (IEA), and as noted by Bruce Carson elsewhere in this issue of Policy Options, world primary energy demand is estimated to increase by 1.5 percent a year between 2007 and 2030. This means an increase of 40 percent in energy consumption by 2030 over 2007 levels, with by far the fastest growth in energy demand coming from Asia. Further, given current technologies and installed systems, fossil fuels will remain the dominant source of primary energy over the next two decades. And, among fossil fuels, over 75 percent of proven oil reserves are in the hands of state-owned enterprises.
In this global energy context, the obvious question is whether and how the US may be willing to engage other countries, such as Canada, to create win-win energy security partnerships going forward. A few additional facts help put the US-Canada energy relationship in perspective:
- Canada is the largest daily source of imported energy for the US. Each day the US imports 2 million barrels of Canadian oil, more than it does from Saudi Arabia and Kuwait combined, and more than from Venezuela and Iraq combined (see figure 1).
- Canada’s oil sands, which are situated 600 miles from the US-Canada border, total 170 billion barrels of recoverable oil and rank second only to Saudi Arabia in proven reserves; US reserves rank 12th (see figure 2).
- The US gets approximately one third of its uranium supply for nuclear energy from Canada.
- Hydroelectricity from Canada is a major source of renewable power for New England, New York, the upper Midwest, the Pacific Northwest and California.
Canada is the largest daily source of imported energy for the US. Each day the US imports 2 million barrels of Canadian oil, more than it does from Saudi Arabia and Kuwait combined, and more than from Venezuela and Iraq combined.
In supplying this energy to the North American marketplace, Canada accounts for 2 percent of world greenhouse gas (GHG) emissions. The oil sands, the second-largest reserve of recoverable oil in the world, represent 5 percent of Canadian emissions, or less than 1/10th of 1 percent of world GHG emissions. By comparison, GHG emissions from coal-fired power plants in the US are 60 times greater than emissions from Canada’s oil sands (see figure 3).
Complicating the public policy challenge in the US are public expectations for energy security solutions that often appear out of line with energy market realities and complexities. Too often we talk as if there is a ubiquitous energy market. In reality it is a global mishmash of privately owned firms and state-owned enterprises; of commercial markets and government regulations; of market price signals and subsidies; of conventional and alternative energy sources; and of political intentions to reduce GHG emissions but without commensurate policy instruments.
Take the challenge of climate change as a prominent example. The reality is that GHG emissions will only go down in the long term if the effective price of carbon goes up, reducing demand for carbon-intensive energy sources, shifting demand to other energy sources and, importantly, encouraging innovation in supply. Markets react most efficiently to clear price signals, less effectively to uncertainty and complexity, and always take time to adjust when there are huge installed capital bases. And yet, many political proposals to reduce GHGs appear to bear little relation to the IEA’s projections of growth in energy usage, existing carbon pricing and current technology envelopes.
Overlying the framing of US energy security is the deep and multi-layered relationship between Canada and the US. Our nations confront many similar issues in terms of energy, the environment and the economy. Not only do the US and Canada share an integrated North American economy, but we are also custodians of a North American environmental space that is frequently not constrained by national borders.
The US is seeking security of energy supply, and secure supplies should be a premium product at a premium price. Canada is seeking security of demand, and at a price commensurate with the unique security aspects of its energy supplies. In both the US and Canada, the public is seeking clarity about climate change policies and is concerned about a hodgepodge of uncoordinated environmental regulations and approaches. Business wants more certainty about longer-term environmental policies, including carbon pricing, to guide investment decisions. This unique intersection of economics, environmental stewardship, energy capacity and needs, and shared security interests should provide the basis for a mutually beneficial energy security partnership.
It is interesting to speculate how the US might engage Canada as part of achieving its energy security. It would have to take into consideration Canada’s energy security needs, including new alternative sources of demand to ensure competitive forces generate appropriate prices for Canada’s secure, long-term energy supply capacity. It would have to recognize the need for coordinated policy actions. And it would need to include Canada as a partner in energy R&D and innovation, which are key to jointly achieving energy security, energy efficiency and environmental sustainability objectives. With an integrated economy, interconnected energy markets and common pressures to tackle climate change, including carbon pricing, bilateral negotiations toward an energy and environmental accord, not unilateral actions, are in everyone’s best long-term interests.
From a Canadian perspective, change is also required. Canada needs to embrace a more global, more long-term, more innovation-driven and more integrated energy-environmental approach. A recent report from the task force on Energy, the Environment and Climate Change of the Canadian Council of Chief Executives noted that Canada needs to be more strategic about our energy resources and environmental objectives. To do so, the Task Force “calls for a compelling vision and far-sighted leaders, particularly in the business community, to make the case. It must be built on cooperation amongst all levels of government, a sound strategy with complementary elements that are national, continental and global in scope, and with the engagement and support of Canadians.” Not a bad starting point for a Canadian energy strategy.