• 5 minutes 'No - Deal Brexit' vs 'Operation Fear' Globalist Pushback ... Impact to World Economies and Oil
  • 8 minutes China has *Already* Lost the Trade War. Meantime, the U.S. Might Sanction China’s Largest Oil Company
  • 12 minutes Will Uncle Sam Step Up and Cut Production
  • 1 hour OPEC will consider all options. What options do they have ?
  • 6 hours Maybe 8 to 10 "good" years left in oil industry * UAE model for Economic Deversification * Others spent oil billions on funding terrorism, wars, suppressing dissidents, building nukes * Too late now
  • 12 hours Russia Accuses U.S. Of Stoking Tensions With Missile Test
  • 3 hours What to tell my students
  • 3 hours Recession Jitters Are Rising. Is There Reason To Worry?
  • 3 hours CLIMATE PANIC! ELEVENTY!!! "250,000 people die a year due to the climate crisis"
  • 16 hours With Global Warming Greenland is Prime Real Estate
  • 7 hours TRUMP'S FORMER 'CHRISTIAN LIAISON' SAYS DEEPWATER HORIZON DISASTER WAS GOD'S PUNISHMENT FOR OBAMA ISRAEL DIVISION
  • 4 hours NATGAS, LNG, Technology, benefits etc , cleaner global energy fuel
  • 2 hours Trump vs. Xi Trade Battle, Running Commentary from Conservative Tree House
  • 1 day Domino Effect: Rashida Tlaib Rejects Israel's Offer For 'Humanitarian' Visit To West Bank
  • 23 hours In The Bright Of New Administration Rules: Immigrants as Economic Contributors
  • 8 hours Flaring is at Record Highs in Texas
Alt Text

New Middle East Proxy War Could Jolt Oil Prices

Iran’s oil exports have fallen…

Alt Text

The Oil Kingdom Enters A New Era

Saudi Arabia and Mohammed bin…

Peter Tertzakian

Peter Tertzakian

Peter is an economist, investment strategist, author and public speaker on issues vital to the future of energy. He has clocked over 30 years of…

More Info

Premium Content

An Energy Independent North America Needs NAFTA

NAFTA talks continue. Goods like milk, lumber and auto parts are all under the negotiators’ microscopes. Oil is clearly visible too.

Last year, the bilateral trade of energy (including natural gas, oil and power) between the U.S. and Canada was about U.S $55 billion, with oil being 80 percent of the total. Its dollar amount dwarfs other industries, but negotiators may need to view this vital commodity using a different lens.

Beyond size, the upstream oil business between America and Canada reveals big shifts in dollar and volume trade over the past few years.

The United States has long been its northern neighbor’s biggest oil customer. Yet since 2014, it’s reciprocally grown to become Canada’s biggest supplier too. As a result of this bilateral exchange of barrels, the growth in the oil trade deficit (from the American perspective) has slowed down somewhat. That’s notable for negotiations. But of more interest is that both countries have pushed out a large portion of their “foreign oil” suppliers.

So, the upshot of NAFTA vis-à-vis oil may be less about trade and more about mutual energy security—a qualitative market consideration that also calms down price volatility.

Oil prices are less jittery if North America and the western world feel more resilient to supply shocks. The threat of real shortages a la the 1970s is a distant memory that’s reserved for industry veterans; most oil traders today weren’t even alive back then.

Related: Russia’s Comeback In The LNG Race

For decades, a “geopolitical premium” was layered onto the price of a barrel of oil. The threat of military conflict or disruption of delivery from places like the Middle East or Africa was a lingering uncertainty that warranted a bonus for safe delivery. For example, the premium expanded during the Iraq War in the early 2000s, and again in 2011 when Libya’s civil war curtailed the country’s production. For much of the early 2010’s, the market layered on a geopolitical premium of about $US 10 a barrel.

Things started changing about half-a-dozen years ago when the US started producing more of its own light tight oils. Concurrently, Canada was ramping up its heavier oil sands production, destined for Gulf Coast refineries. So, Americans bought more western Canadian oil. And Eastern Canada began buying more US oil, delivered by tanker from the Gulf Coast and by rail car from North Dakota. This increasing oil swap began happening at the expense of foreign suppliers. Nigeria, Algeria, Venezuela, and Angola all lost market share in the United States as a result.

In short, Canada and the United States are bilaterally trading more oil than ever, more intertwined than ever, more collectively secure than ever. Since 2011, Canadian oil sales to the US have grown 1 million B/d. Meanwhile, Canada’s crude oil imports from the US have grown from almost nothing in 2011 to averaging 300,000 B/d in 2016. Dollar-wise, at today’s oil prices, Americans buy about $US 45 billion a year of Canadian crude oil. Reversing the flow, Canadians now buy about $US 5 billion a year.

Data from Figure 1 shows that almost 55% of Canada’s 760,000 B/d of oil imports now comes from its southern neighbor. Imports from some Middle East suppliers have been replaced, as have geopolitically benign sources from the North Sea.

Consequently, for the first time in 70 years the U.S. and Canada are meaningfully reducing their dependence on oil from places that have historically been associated with geopolitical uncertainty. The U.S. has dropped its dependency on foreign, non-Canadian barrels by 36 percent since 2010. That’s one of the reasons why events like rebels attacking oil facilities in Nigeria or military actions in the Middle East garner no more than a yawn in oil markets these days.

Related: Can Mexico Capitalize On This Golden Oil Opportunity?

Excess global inventories, still about 10 percent above typical levels, remains another major factor in price weakness. And it provides market comfort that a serious outage in a far corner of the world can be offset by drawing from filled-up storage tanks. Nevertheless, the qualitative value of an increasingly oil-secure North American continent, which will increasingly include Mexico too, is tacitly present in traders’ psyche. The real test of the value of North American energy security will come when global inventories draw down, which is expected over the next few years.

Which brings us back to NAFTA in the context of a world that remains hostage to unforeseen geopolitical events and the vagaries of OPEC action. The relative dollar value of the North American oil trade can easily be calculated, but the question is whether negotiators’ microscopes will see the value of energy security.

By Peter Tertzakian for Oilprice.com

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play