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Saudi Arabia is Not Our Ally

Oil Tanker

Saudi Arabia and its government have been an annoyance of mine for years now. I understand and appreciate the base aspects of the alliance as there are economic incentives that come along with a wealthy partner. However, it is time for Canada to disengage from this international partner or at the very least, set an example that to do business with Canada. There are standards to adhere to—most notably, human rights.

The Kingdom is failing miserably in this respect. The ongoing investigation into the murder of Washington Post journalist Jamal Khashoggi demonstrates that under the rule of Crown Prince Mohammed bin Salman, Saudi Arabia is willing to go to draconian measures in order to protect their interests. Khashoggi’s cold-blooded murder is a tyrannical act, and democratic countries the world over must stand up to this regime.

It’s very important to point out that our so-called ally orchestrated the downfall of the oil sector back in 2014. Author and historian Gwynne Dyer has written several articles on the topic and stated, “The Saudi objective was to keep the oil price low enough, long enough, to drive American shale oil producers out of business and preserve the OPEC cartel’s market share.”1 The Organization of Petroleum Exporting Countries (OPEC) controls about 30 percent of world oil production. As fracking began to bolster North American production, Saudi Arabia feared their market share eroding and took aggressive measures. In late 2014, they ramped up production and flooded the market with their product effectively dropping the international price of oil. Why should we care about this as Canadians? We should care because this was a direct attack on our oil industry. It was a strategic attempt to undermine our operations so that enough oil business in North America would vanish as it would be unable to keep up with the high cost of production while selling the product at a reduced rate.

The gamble did not pay off. The Saudis underestimated the resolve of the North American oil sector and more importantly, the investment that has gone into its long-term success. The sector has slowly recovered and there has been talk of oil prices heading back to $100 per barrel prices.2

The other piece of this puzzle is how Saudi Arabia aggressively severed ties with Canada over a diplomatic spat. It all started in August with a tweet from Foreign Affairs Minister Chrystia Freeland3 concerning the arrests of several civil rights protestors.  The Kingdom did not take the tweet lightly and immediately shot back, criticizing Canada’s “negative and surprising attitude.”4

The Saudis began retaliatory measures expelling Canada’s ambassador and suspended all trade between the countries. It has also taken measures to end scholarship programs in Canada, arranged all Saudi patients in Canadian hospitals to be transferred out of the country, and blacklisted Canadian wheat and barley, and ordered their central bank and pension funds to dump Canadian assets “no matter the cost”.5 Such a hypersensitive response is indicative of the kind of pressure they feel regarding any criticism of their human rights record. It also begs the question of, why are we trading with such an antagonistic partner?

This answer is pretty straightforward—trade between our two countries is worth more than $3 billion a year.6 Saudi Arabia ranks 20th amongst our largest trading partners.7 However, don’t be overwhelmed by these numbers. Canada trades more with Belgium! But, Belgium is not trading in a crucial commodity like oil. Canada purchases some $300 million worth of oil from Saudi Arabia every month.8

In order to help untangle all the issues at play here, I’d like to share a good analysis that helped me understand why things are the way they are. In a National Post article, Tristan Hopper pointed out that you must think of oil the same way you might think of whiskey, “There are many different types and qualities. A bourbon connoisseur probably isn’t going to be happy with a bottle of Old Crow and a Manhattan isn’t going to taste the same if it’s made out of Scotch.”9 Oil coming out of the Athabasca Oil Sands is classified as WCS (Western Canadian Select). WCS is a lower quality oil, and its major problem is that only a small number of complex refineries throughout the world can refine it into gasoline. Saudi Arabian crude on the other hand is the Macallan of oils and can be easily processed anywhere which explains the constant and long-term demand it has had in the Canadian market.

In order to properly explain the complexity of oil refinement in Canada, one needs to do a lot of intensive research. However, for any who are interested, the Canadian Energy Research Institute (CERI) published a study early this year titled: An Economic and Environmental Assessment of Eastern Canadian Crude Oil Imports.10 Key findings of the study show that Canadian refineries have the opportunity to purchase domestic crude oil supply and realize potential cost savings.

Four scenarios were evaluated in order to assess the potential substitution, complete or partial, of imported foreign oil in the central and eastern Canadian refinery market with a domestically sourced oil supply and provide cost emissions comparison of four potential scenarios as compared to a base case.11

The Four Scenarios

  1. Made in Canada – assumes that all Canadian crude, be it from western or eastern parts of the country, will substitute for all foreign imported crude oil via expanded transportation infrastructure.
  2. Expanded Access – is a market-based approach. Western & eastern Canadian crude oil is transported to central & eastern refineries via an expanded transportation infrastructure. This scenario allows for more domestic volumes to be substituted economically.
  3. Current Reality adopts a market-based approach, optimizing for cost of feedstock and emissions. Assumption: Crude oil can be transported from western & eastern Canada to eastern Canadian refineries via existing infrastructure.
  4. International Social Concerns assumes that crude oil will be transported to eastern markets via the existing pipeline infrastructure & rail. Assumption: Canadian crude will replace foreign crude from countries that have generated international concern regarding their treatment of citizens or the environment.12

In all four scenarios, substituting Canadian crude oil for imported oil resulted in reduced overall global CO2 emissions. Cost savings ranged from $23 million in the Made in Canada scenario to $317 million in the Expanded Access scenario.

Both the Made in Canada and Expanded Access scenarios envision expanded pipeline infrastructure. This is a very important study in terms of guiding development of our oil production and refining capabilities. It demonstrates that the base economic numbers are on the side of using Canadian product over imported product. Plus, it also has distinct environmental benefits over the status quo.

As recently as 2010, Saudi Arabia ranked as Canada’s 5th largest supplier of foreign oil. Today it is second only to the United States.13 This level of reliance on a hostile foreign power should be the cause of much concern. Therefore, there is a strong and rational argument for Canada’s bolstering its infrastructure capabilities so that oil can flow cheaper and easier from west to east.

References

1 gwynnedyer.com/2016/oil-downturn/

2 oilprice.com/Energy/Oil-Prices/100-Oil-Is-Back-On-The-Table.html

3,4,5 globalnews.ca/news/4378208/canada-saudi-arabia-spat/

6 globalnews.ca/news/4378071/saudi-arabia-canada-oil/

7 www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1210001101

8,9 nationalpost.com/news/canada/why-has-canada-spent-billions-of-dollars-buying-saudi-arabian-oil

10ceri.ca/studies/an-economic-and-environmental-assessment-of-eastern-canada-crude-oil-imports

11, 12 ceri.ca/assets/files/Study%20167%20Overview.pdf

13 nationalpost.com/news/canada/why-has-canada-spent-billions-of-dollars-buying-saudi-arabian-oil