Course:ECON371/UBCO20010WT1/GROUP3/Article4
Summary
Canada’s 179 billion barrels of oil and gas reserves ranks second amongst the world due to the energy-rich province of Alberta. As a result, energy has been one of Canada’s largest exports in recent years. The biggest importer of Canada’s energy resources is no doubt its neighbouring nation, United States which accounts to 22% of Canada’s total energy export.
That being said, the US also imports oil from Mexico, Saudi Arabia, and Venezuela due to the vast and growing demand of oil in the States. The reason for US being such an oil intensive importing nation is because of the lack of resources found within its country and that buying from Canada neither props up an authoritarian regime nor exposes the United States to political manipulation of its energy supply.
However, the verdict here is that Canadian crude is extremely dirty and can be an environment hazard to its surrounding. Therefore, there has been pressure from the public and lawmakers for United States to analyse the environmental impact importing crude from Canada before continuing to do so.
Economic Analysis
The production of Canadian crude is a very costly and environmentally damaging process. The process only becomes profitable with oil prices in the $65 - $85 range or higher, also it is believed that producing the Canadian tar-sands which is used in the production on crude can generate 82% or more greenhouse-gas emission than the averaged barrel refined in the states. Furthermore, the export of energy amounts up to a quarter of Alberta’s $211 million economy. Therefore if regulations were to be drawn up on Canadian crude, the Canadian economy will suffer a serious set-back that would see the quantity of Canadian crude reduced significantly while driving oil prices to a very high level. As a result of this, the oil industry’s importance has always trumped green concerns.
In the case of actual Canadian oil spill which happened earlier in July where a pipeline ruptures that spilled 19,500 barrels of Canadian oil into the Kalamazoo river of Michigan, the cost of the damage cost is really difficult to measure. For example damages can be very long lasting with damages to the local fishery industry and possible tourism. All these costs are externalities that the Canadian government should be responsible for, therefore the Canadian government will just be operating at a point right below the point of social efficiency.
Conclusion
Although the social optimal decision is for the US to limit its imports of Canadian crude, in reality it is not likely to happen especially after Gulf spilled that have reduced its supply significantly and likely to increase the US’ dependence on Canadian supplies. The best solution the sands problem is probably to just find an alternative fuel source or simply just to reduce consumption levels. This way social cost (reduced chance of spill) can be potentially reduced while social benefits are maximized.
Prof's Comments
To the extent that marginal damages from oil sands production exceeds marginal benefits, oil sands production is too high. Would it be efficient to stop using oil from the oil sands? Why should the Canadian government take responsibility for the externality? Remember the Coase theorem. Where the property rights are assigned isn't important for efficiency, as long as they are defined and clear. Thus, perhaps importers should take responsibility and reduce their demand, which would drive the price below the threshold.
Be careful with normative statements. They must be justified.