MARKET NEWS

By Anam Khan

Canadian oil markets do not have to worry about Venezuelan oil substituting Canadian oil at U.S. refineries — at least for now, according to one economic analyst.

Only 10 per cent of Canadian oil could be replaced by Venezuela in the short term, Charles St-Arnaud, chief economist at Service Credit Union and former Bank of Canada economist, told BNN Bloomberg.

His analysis comes amid fears that Venezuelan crude could eventually compete with and displace Canadian barrels in key U.S. refining markets after U.S. President Donald Trump announced plans to operate and revitalize Venezuela’s oil industry following Maduro’s ouster.

St-Arnaud explained that while more than 90 per cent of Canadian oil goes to the U.S., the risk of being replaced by Venezuelan oil depends on which U.S. regions the oil goes to.

He said that 70 per cent of Canadian oil is exported to the refineries in the U.S. Midwest, 10 per cent is exported to the Gulf Coast and another 10 per cent goes to the West Coast.

“The only place where Canadian oil could be displaced is really at the Gulf Coast, where the U.S. could import oil directly from Venezuela to use in those refineries,” said St-Arnaud.

He explains that oil arriving at the Gulf Coast cannot travel north toward the Midwest refineries because the pipeline system is designed to bring Canadian oil from the Midwest to the Gulf Coast.

On the other hand, the refineries on the West Coast have direct access to Canadian exports because they are fed through a branch in the Trans Mountain system.

“So it will be very hard for venues or Venezuelan oil to actually reach that region,” said St-Arnaud.

Venezuela would have to drastically ramp up production

Currently, Venezuela produces about one million barrels of oil per day, while Canada produces approximately five million.

To displace more Canadian oil, Venezuela would need to significantly ramp up production, according to St-Arnaud. He also questions whether there is an incentive to transport that oil to the Midwest.

“Is the pricing good? Is the investment in the pipeline infrastructure favourable enough to actually justify that investment?” he asks.

“That’s why, in the short term, it is very difficult for Venezuelan oil to displace Canadian oil. In the long term, if the economic incentives are there, it remains a possibility.”

A 10 per cent loss of oil exports would represent an approximate $13 billion loss for Canada. While manageable at a national level, it would result in a three per cent hit to Alberta’s GDP. Furthermore, competition between Canadian and Venezuelan oil would likely lead to price discounts on Canadian crude.

“That will have more impact on the economy, but also a lot of impact on the fiscal situation here in Alberta,” St-Arnaud added.

How much Venezuelan production can be expected in the short term?

Venezuelan oil output will begin increasing in the fourth quarter of this year, according to a forecast by Eric Lee, energy strategist at Citigroup.

He said if sanctions and blockades are lifted, he expects an additional production of half a million barrels per day.

“You might need on the order of US$100 billion of more sustained investment up to a decade before you could see Venezuela getting back to historic highs,” Lee told BNN Bloomberg.

“It was once at three to 3.5 million barrels…that would be a longer road, in our view.”

Oil as a leverage in Canada’s trade agreement

In the upcoming trade agreement, if the U.S. suggests it doesn’t need Canada’s oil because it has access to Venezuelan oil reserves, the Canadian government can call its bluff.

According to St-Arnaud, the Canadian government can challenge this claim because the U.S. would require immense investment to increase production enough to displace Canadian oil.

“So that’s not a guarantee yet,” said St-Arnaud, adding that increased production in Venezuela would also contribute to the current global oil oversupply.

“With those low oil prices, will the financial incentive of producing more and committing more long-term investment money actually make sense for the big American companies?”