Canada is awash in natural resource wealth yet the Canadian dollar is the dog of the FX market in 2014. Reading stories like this explains understand why.
Bank of Nova Scotia commodity analyst Patricia Mohr believes that US oil products will flow into Canada at a much faster pace in the coming years.
“U.S. producers are increasingly viewing eastern Canada as a potential oil export market,” she wrote and noted that US exports to Eastern Canada expanded last year.
The problem is that Canadian oil infrastructure is a disaster. Years ago, Canadian politicians allowed the ‘free market’ to dictate the development of oil sands that rival reserves in Saudi Arabia. The thing is, the ‘free market’ is a few US oil giants who work hand-in-glove with the US government and the US government works for investment and jobs in the US (as they should).
Canada could have encouraged refining capacity like the US (the US bans crude oil exports) but instead the ‘free market’ plan was to extract Canadian crude, ship it as far away as the Texas gulf coast then ship back refined products to Canada. There is no East-West crude pipeline capacity in Canada and nowhere near enough refining capacity.
It was a stupid system but it wasn’t that bad. At least until US shale production shot higher overnight and threatened to overwhelm US refineries who now only take Canadian oil at a steep discount. On top of that, Obama has taken 5 years to decide on Keystone XL and will probably block it. Now, because there is no Canadian refining, export or domestic transportation system, you have an enormous glut of underpriced raw crude for export to a single market that’s blocking pipelines, so you’re going to use trains to export it, which is ridiculous. Meanwhile, the other half of the country is paying the full import price for refined gasoline.