US embassy cable - 05OTTAWA2688

UNCLAS SECTION 01 OF 02 OTTAWA 002688 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR WHA/CAN (NELSON, HOLST), EB/ESC/IEC/EPC (MCMANUS) 
AND INR (SALCEDO) 
 
USDOE FOR INTERNATIONAL AFFAIRS: PUMPHREY, DEUTSCH 
 
USDOC FOR 4310/MAC/ONA 
 
E.O. 12958: N/A 
TAGS: ENRG, ECON, EPET, CA 
SUBJECT:  CANADIAN VIEWS OF HURRICANE KATRINA ENERGY SUPPLY 
DISRUPTIONS: GREATEST RISK MAY BE THE POLICY RESPONSE 
 
REF:  STATE 163206 
 
1.  (U) This message is sensitive, but unclassified.  Not 
for distribution outside USG channels. 
 
SUMMARY/INTRODUCTION 
-------------------- 
 
2.  (SBU) In the wake of Hurricane Katrina, the Government 
of Canada (GOC) has pledged its support through the 
International Energy Agency to increase oil supplies by 
91,000 barrels per day, much of which will find its way to 
U.S. markets.  Federal and provincial officials are 
exploring further ways in which Canada can increase 
petroleum supplies.  In the private sector, Canadian energy 
sector leaders say that while their industries have had few 
immediate difficulties responding to the repercussions from 
the hurricane disaster, there is very little they can do to 
relieve the pressure on prices given the pre-existing tight 
market conditions.  With a federal election expected this 
winter, they worry that a "perfect storm" of political 
conditions will lead to ill-considered promises and 
intrusive policies by the Canadian government.  End 
summary/introduction. 
 
GOC RESPONSE 
------------ 
 
3.  (SBU) The GOC has pledged to increase petroleum supplies 
by 91,000 barrels of crude oil per day, representing about 
4.6 percent of the two million barrel per day increase 
agreed to by member nations of the International Energy 
Agency.  This is in addition to the approximately 1.6 
million barrels of oil per day which Canada already supplies 
to the United States.  Total Canadian petroleum production 
is about 3.1 million barrels per day, and domestic 
consumption is about 2.3 million barrels per day (the 
difference is due to Canadian oil imports of about 800 
thousand barrels per day). 
 
4.  (SBU) According to a contact at Canada's Department of 
Natural Resources, or NRCan, the federal government is 
exploring a variety of options to increase supplies 
available for the United States.  About one-third of the 
extra 91,000 barrels per day, or 30,000 barrels, will come 
from production increases in Alberta, whose provincial 
Energy and Utilities Board has already approved the 
increased production.  Among other possibilities to enhance 
output in the Canadian oil patch are changes in well 
pressure to increase the flow of petroleum to the surface, 
and postponing or delaying scheduled maintenance or upgrades 
on refineries so that production may continue unabated. 
 
5.  (SBU) The NRCan official cautioned, however, that 
Canadian production is already near its maximum, given 
constraints on refining and transportation.  Conservation, 
therefore, will also play a key role in making available a 
considerable portion of the extra 91,000 barrels per day. 
With retail gasoline prices in Canada reaching as much as 
C$1.30 per liter (C$1.00 equals $.80 U.S.), the official 
noted that there should be some short-term demand reduction 
as many consumers reduce their gasoline consumption, which 
should free up additional supplies. 
 
INDUSTRY VIEWS:  "A PERFECT POLICY STORM" 
---------------------------------------- 
 
6.  (SBU) Emboffs spoke with a range of Canadian energy 
industry representatives, who made the following key points: 
 
There was a pre-existing demand peak in energy markets, so 
most energy supply systems in Canada were already near 
capacity before the hurricane.  Nevertheless, producers are 
doing whatever they can to increase the flow.  Industry-to- 
industry contacts have enabled more effective transmission 
of oil and gas throughout the North American distribution 
system, and for the most part the energy trade between 
Canada and the United States has not been affected by the 
hurricane. 
 
-- Canadian chemical producers are strongly reliant on 
natural gas supplies and they say they have little capacity 
to pass on cost increases to their customers.  In their 
view, the post-hurricane situation highlights the relative 
isolation of North American gas markets from overseas 
suppliers.  They expect the spike in natural gas prices to 
create real disconnects in supply chains.  Safety concerns, 
they stress, slow down the process of re-starting plants in 
this industry once they go down. 
 
-- Our contacts expected high energy prices to continue into 
the winter heating and lighting season, when the combined 
effect of higher gasoline, heating fuel and electricity 
costs will likely create real pain for many Canadian 
households.  Historical experience suggests that consumer 
habits will take years to respond to these price increases, 
so demand will not abate much this winter. 
 
 
-- In the expected late fall or winter election campaign, 
the parties will be under severe pressure to promise voters 
relief from high energy prices.  Even sympathetic 
politicians have told our industry contacts that they will 
have difficulty withstanding such pressure.  The risk of 
what our contacts call "ill-considered promises" is very 
high. 
 
-- The broader economic impact of energy price spikes on 
Canada's macro-economy is fairly clear.  There is a short- 
run boost to GDP in the producing regions (chiefly Alberta) 
and to government tax revenues.  However, this is somewhat 
exceeded by the negative effects later on as other sectors 
suffer and the price increases work their way through to the 
consumer price index. 
 
COMMENT: CANADA'S POLITICS OF ENERGY 
------------------------------------ 
 
7.  (SBU) The governing Liberal Party is shaky, hampered by 
a major scandal and by the fact that it commands only a 
minority of legislative seats.  An election is expected 
sometime during the coming winter.  The Liberals are 
desperate to regain a majority in Parliament and they have a 
well-established habit of shifting to the left when 
campaigning.  Further, there is precedent for massive 
government intervention in the energy sector: From 1980- 
1984, the GOC attempted to limit oil exports in order to 
keep domestic prices below world levels.  This now-infamous 
"National Energy Policy" created lasting inter-regional 
resentments by transferring billions in wealth from oil- 
producing Alberta to the industrial heartland in Ontario and 
Quebec. 
 
8.  (SBU) Comment, continued:  While Alberta and the energy 
industry remain vigilant against a return to interventionist 
policies, we see signs that Canada's economic policy 
pendulum has been tending in that direction.  Hurricane 
Katrina may have given that pendulum a further nudge, 
especially as confidence in, and understanding of, market 
forces seems particularly weak where energy is concerned.  A 
majority of Canadians believe that gasoline prices are 
manipulated by major oil firms, and a poll of 1500 Canadians 
taken during the last week of August (before most of the 
hurricane's effects were felt) found that 49 percent of 
respondents favored nationalizing petroleum resources.