An Independent Canada Struggles with Energy-Fueled Inflation

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Written by Daniel Graeber for IIR News Intelligence (Sugar Land, Texas)

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Summary

Federal data from Canada show annual inflation to September was up 3.1%, driven primarily by a geopolitical risk premium supporting commodity prices. After a failed referendum on an independent Alberta, the country is moving forward with a unified stance.

Albertans Choose to Stay

While collectively facing pressure from higher commodity prices, Canadians woke up Tuesday to a unified nation after a referendum charting a path to an independent Alberta failed.

"On October 19, Albertans made a clear choice. They chose unity, to build together, and to take care of each other," Prime Minister Mark Carney said in a statement Tuesday. "Above all, Albertans chose Canada."

Industrial Info Resources offered a deep dive into the energy impacts of an independent Alberta. For instance, the fate of the Trans Mountain crude oil pipeline, co-owned by the federal government but originating in Alberta, would be unclear. It's the only pipeline in Canada that can deliver oil outside of North America.

A study from the University of Calgary, meanwhile, found the United States would likely exploit an independent Alberta given the already-strong economic ties. Alberta is home to most of the Canadian crude oil production, and much of that winds up as exports to the United States.

Federal U.S. data show Canada delivered 3.7 million barrels per day (bpd) to the United States over the week ending Oct. 9, accounting for 63% of the total. Industrial Info Resources, meanwhile, finds a vast network of just crude oil pipelines emanating from a province that sits on some of the largest oil deposits in the world.

The Canadian benchmark for crude oil, Western Canadian Select, usually trades at a discount to rival benchmarks such as West Texas Intermediate in the United States. Compared to the light-sweet oil found in U.S. shale deposits, most of the Canadian oil is heavy-sour. It's harder to refine, churns out fewer valuable end-products and is largely isolated to North America, all factors that help explain the discount.

Early Tuesday, the front-month contract for West Texas Intermediate was trading at around $100 per barrel, while Western Canadian Select was at $86.19.

Industrial Info is tracking 18 operational refineries in the Canadian energy sector with a combined 1.95 million bpd of capacity. Imperial Oil, majority owned by U.S. supermajor ExxonMobil, leads the pack in terms of operational capacity.

Inflation Would Only be 2.2% if Not for Energy

A well-functioning downstream sector and a discounted benchmark, however, aren't enough to tame inflation. Under pressure from U.S. military endeavors in the Middle East, global commodity prices have been supported by a geopolitical risk premium since the conflict began in late February.

"Crude oil prices increased in September, reaching their highest level since May amid ongoing uncertainty about the wars in the Middle East, resulting in higher prices for gasoline and fuel oil," the federal Canadian government said.

The Consumer Price Index in Canada increased 3.1% on an annual basis to September. Stripping out the impact of energy and consumer-level inflation was closer to 2.2%. Gasoline prices alone were up nearly 30% annually to September.

The inflationary pressures come as Prime Minister Carney works to advance an economic agenda that draws on trade diversity given the pressure from U.S. President Donald Trump. Since taking office last year, Carney established an office that will fast-track projects of national interest.

"We are building that future, bigger and faster than ever before," he said Monday. "Canada is securing new trade partners around the world, fast-tracking major, nation-building projects in every part of the country, and unleashing our full potential as a global energy superpower with Alberta at its core."

Alberta will serve as the starting point for a new crude oil pipeline dubbed Pacific Link, recently designated as a project of interest. Included in a joint agreement between Alberta and the federal government earlier this year, data from Industrial Info Resources show the line could carry as much as 1 million bpd.

The first phase of the project could begin next year. It would add to the nation's export potential by tapping Asian economies, with the provincial government of Alberta estimating it could draw in as much as US$140 billion in direct investments for Canada and increase gross domestic product by more than US$20 billion.

By the Numbers

• 30% y-o-y spike in Canadian retail gasoline prices
• $14 discount to WTI for Western Canadian Select

Key Takeaways

• Albertans on Monday rejected a referendum that would have led to independence.
• Prime Minister Carney said he needs Alberta as a component of a comprehensive trade strategy.

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About Industrial Info Resources
Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, Industrial Info Resources is tracking over 250,000 current and future projects worth $30.2 trillion (USD).