After the election of Donald Trump as President, one of the cornerstones of the modern global economic system is being questioned. Trump built his campaign on questioning the status quo, and in economics that has largely meant deriding free trade. This could impact an under-the-radar area of trade between the U.S. and Canada – wholesale electricity.
Electricity trading is a new area of opportunity for trade among the NAFTA members, and it’s an area that has been growing rapidly. For instance, in resource and waterway rich Canada, hydroelectric power is abundant and cheap. Electricity harnessed from dams and reservoirs in Quebec, Manitoba, and British Columbia accounted for 63 percent of Canada’s overall electric supply in 2015.
While the U.S. and Canada have been trading electricity for more than a century - since well before NAFTA – free trade between the countries has contributed to greater levels of trade. In 2014 for instance, Canada exported 45.6 Terawatt hours of electricity to the U.S. In 2015 that number rose to 59.7 Terwatt hours.
That electricity was worth roughly $2.1 billion.
Those electricity imports helped to stave off potential blackouts as electricity production in the Pacific Norwest suffered due to a drought reducing output from hydropower in Washington, Oregon, and California.
In New England, where power prices are extremely high compared to national averages, Canadian exports would help cut costs for consumers. Canadian exporters are attempting to tap this market through six new transmission line projects that are in various stages of planning and construction.
It’s unclear if all of the projects will go through because of local opposition to power lines and a preference by some area residents for other sources of power. Still, with retail rates in some areas of New England as high as $0.26 per kwh, it is clear this is an opportunity.
Energy exports from Canada could be either clean exports like hydropower or conventional like shale oil.
Both types have value in different areas, just as U.S. exports to Canada do.
Indeed, because of the difficulty of transmitting electricity or moving oil, it’s entirely possible that Canada could export to the U.S. while the U.S. exports the exact same good to Canada as well. U.S. oil and natural gas production from Pennsylvania could help power Ontario and Quebec for instance, even as Canadian shale flowed through pipelines from Alberta to the U.S. Infrastructure matters a lot in these settings, especially given the difficulties most companies are facing in building new pipelines (Exhibit A: see the Dakota Access Pipeline).
Only time will tell how changes in free trade impact the U.S.-Canada energy markets or the nascent market for Mexican oil. Still, it is clear that companies looking to capitalize on trade probably face an uphill political battle compared to the environment a year ago.
The irony of President Trump’s position is that economists from both sides of the aisle almost universally agree that free trade is good.
There are actually more Republican economists than Democratic economists according to industry surveys, yet President Trump is ignoring that wing of the party.
Despite the economic reality that free trade is an overall positive for the country as a whole, there are several weaknesses which make it vulnerable as a political point.
First, trade is not positive for every single individual in a country, and second, trade may have short term negative consequences. These points are what has undermined the free trade argument for many Americans and are what is jeopardizing U.S.-Canadian electricity trading.
By Michael McDonald of Oilprice.com
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