Another second-best solution for Alberta’s oil transport woes

On top of the second-best solution to buying railroad cars (putting Alberta taxpayers into the railroad business) and the second-best solution of curtailing oil production in Alberta, Premier Notley recently rolled out still another second-best solution to our oil transport problems—refine more oil in Alberta to ship finished product (presumably in rail cars and transport trucks) rather than expanding our pipeline access to tidewater for bitumen.

The premier has put out a call for bids to construct a new $2 billion refinery in Edmonton, and the government is offering a $440 million loan guarantee to help build the project.

The idea has intuitive appeal—after all, on first blush, who doesn’t find the idea of adding value locally while creating jobs and perhaps creating higher value petroleum products than simply diluted bitumen?

The problem is, intuition is no way to plan billion dollar businesses. And there are many reasons why it’s more advisable to refine products closer to the markets that will consume them. Writing in the National Post, Tristin Hopper runs through a long list of reasons why we ought not to refine more products here in Alberta.

One of the reasons I alluded to above—it’s generally considered best to refine oil products close to markets that will consume them, for a variety of reasons. Refined products are less stable than crude oil, and refineries can adjust outputs based on local knowledge of local demand more quickly than distant refineries with limited local knowledge of demand growth. It’s also preferable to site refineries on major waterways and coasts for easy access to foreign markets, which is precisely why we can’t get our oil to tidewater in the first place.

Among Hopper’s inconvenient truths are:

• Canada already exports more refined products than we import.
• Our existing refineries are not running at full capacity.
• The people buying our oil (the Americans) are not the people interested in buying our gas and diesel.
• Western Canada has only built one refinery since the 1970s, and Hopper describes that as a “kind of a boondoggle.” (It was also dependent on government support.) When it went into operation in March 2017, there was already a fuel glut in the market.
• Refineries are very expensive, but refining isn’t very lucrative.