Canadian Gasoline Flows South To Thirsty U.S. Market

Over the past four years, Canada has quietly emerged as the second-most important gasoline supplier to the United States -- just behind all of Western Europe -- vaulting ahead of traditional front-runners such as Venezuela and the U.S. Virgin Islands. Data from the Energy Information Administration show U.S. imports from Canada jumping to 68.6 million barrels in 2003 from 22.2 million barrels in 1999, with shipments in 2004 holding steady at last year's record levels.

The rise in gasoline exports is one sign of the increasing intertwining of the energy economies of Canada and the United States, which some observers say are already indistinguishable. "The Canadian market is not a market. It's part of a continental market," says Dane Baily, a vice-president at the Canadian Petroleum Products Institute, the umbrella group for the retail operations of integrated oil and gas companies.

Yet, that continental market is remarkably one-sided, with the United States exporting only a negligible amount of gasoline to Canada, according to the EIA, the statistical arm of the U.S. Energy Department. EIA analyst Michael Burdette said he is surprised to see that so little gasoline is shipped northward, while Mr. Baily said he would expect that to be the case, since the United States depends heavily on imports to satisfy domestic demand. It would make little sense for the country to then turn around and export large quantities, he said.

But the effect is to constrain supply in Canada and send prices higher than they would otherwise have been. Mr. Baily conceded that point, but says it is a result of the forces of supply and demand operating in a free market that transcends national boundaries -- and is protected under the North American free-trade agreement.

He said that an abrogation of NAFTA would be one way of curtailing gasoline exports, but at the unacceptably high price of cutting the oil industry off from the world market, among other undesirable consequences. Mr. Baily said the 1980s-era national energy program showed the folly of attempting to set made-in-Canada prices.

However, the thirst for Canadian gasoline is unlikely to ease any time soon, as several factors converge and drive up U.S. demand for imports. Chief among them is the continued growth of U.S. gasoline consumption, undented by rising pump prices. Mr. Burdette said the EIA is forecasting annual growth in gasoline demand of between 1 per cent and 2 per cent -- even while refinery capacity remains static.

"Our refineries are bumping up against their capacity limits," he said. On top of that, stricter environmental requirements in some states have curtailed shipments from countries such as Venezuela, which have not made the expensive adjustments to produce cleaner fuels. Venezuela was the second-biggest supplier of gasoline to the United States as recently as 1999, but has since dropped to sixth.

Western Europe has been the top supplier since 2001, but its ability to increase shipments to the United States is in doubt. For now, the shift of European drivers to diesel from gasoline has created ample room for exports. But an executive with Total SA, the largest refiner on the continent, recently cautioned that there are no plans to build new facilities to serve the U.S. market once that capacity is tapped out.

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