Pipeline Shortage Costs B.C. Lower Mainland Residents $1.5 Billion Per Year: ANALYSIS

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Will the Trans Mountain Pipeline Expansion (TMX) help lower fuel prices in British Columbia?

A new report by the C.D. Howe Institute suggests that B.C. Lower Mainland residents may very well get some relief at the pump due to the completion of TMX.

Pipeline bottlenecks have resulted in significant costs for B.C. Lower Mainland residents who have paid $1.5 billion more per year in wholesale fuel prices since 2015, or approximately $15 billion to date, according to the Ontario-based think tank.

The supply/demand crunch caused by a lack of sufficient energy infrastructure is a cautionary tale. Other such examples include the attempt to shut down Line 5, a pipeline which supplies critical fuel supplies to Ontario through the U.S, Canada’s increasing reliance on electrification without adequate expansion of its transmission and distribution networks, and potential limitations on rail and road infrastructure that may affect domestic and international trade.

Below, we review the highlights of The Big Squeeze: Lessons from the Trans Mountain Pipeline about the Costs of Invisible Bottlenecks by G. Kent Fellows of the C.D. Howe Institute.

Please be advised that some context of the report has been left out to make this summary simpler and more concise; we recommend you read the full report for more details.

Report Highlights

• While not always easily comprehendible, public/private transportation infrastructure tends to obey the laws of supply and demand. Insufficient infrastructure typically results in higher costs for consumers who want to use such infrastructure. Because most infrastructure is public with no user fee or regulated where the user fee is restricted, it becomes easy to overlook the fundamental relationship between supply and demand.
• Costs associated with insufficient infrastructure may not be apparent, but they still exist and appear elsewhere in the economy.
• The original Trans Mountain Pipeline (TMP) saw a significant increase in demand to ship more products, resulting in its application to more than double the pipeline’s capacity in 2013. The initial application’s goal was to complete the expansion by 2019.
• Regulatory and construction delays extended the TMX’s planned in-service date by over a decade.
• Due to changes in apportionment regulations (please read the full report), the volume of refined products transported by TMP has halved since 2015, while overall gasoline demand in B.C. did not drop at the same rate.
• A clear relationship between falling refined product flows on the original pipeline and the increasing price difference between Edmonton and B.C. cities is unmistakable.
• As of 2023, the fuel price differential had grown to between 20 and 35 cents per litre, depending on the city and month — a direct result of insufficient infrastructure, specifically the constraints on the Trans Mountain pipeline.
• Existing TMP constraints and regulatory changes have increased B.C. Lower Mainland wholesale fuel prices by more than 10 cents per litre since 2019 and between 20 and 30 cents per litre in 2023.
• Rough calculations show that insufficient pipeline capacity costs the B.C. economy around $500 per person annually, or $1,200 per average household. With three million people living in the B.C. Lower Mainland, this equates to roughly $1.5 billion per year.

Other Potential Infrastructure “Squeezes” in Canada

Fellows says there is a lesson to be learned from past pipeline infrastructure constraints.

Every productive economic sector in Canada needs high-quality and efficient transportation and/or telecommunications infrastructure to function accordingly. As the second-largest country in the world with a relatively small population, it can be challenging to move goods and services across Canada’s vast and varied geography.

And while TMX represents perhaps the biggest “squeeze” when it comes to infrastructure, others also exist in the country, including:

Line 5 – The attempt to shut down Line 5 would create a shortage of more than 50 million litres of petroleum products per day in Ontario, Quebec, Indiana, Ohio, Wisconsin, and Pennsylvania.

Electrification – Canada’s future energy goals heavily rely on electrification, yet our country's existing transmission networks and distribution facilities need significant expansion to avoid any shortages.

Rail and Road – Several dozen studies over the past decade show limitations on Canada’s road and rail infrastructure, resulting in similar shortages for domestic and international trade. Hence, a new transportation strategy is urgent.

According to the European Court of Auditors, Canada is the only industrialized Western economy without a recognizable transportation strategy. In addition to lacking such a strategy, the cost of building new infrastructure is hefty and, in many cases, too much for investors to look past, making it difficult for the country to attract new business investment.

Take the TMX, for example. It was initially estimated at just over $5 billion, but today, its budget is well over $30 billion. A sixfold increase in the TMX budget does not inspire new investment in private or public sector infrastructure. Massive cost overruns and lengthy regulatory delays do nothing to underpin investor confidence in our country, “squeezing” capital away to other more attractive jurisdictions like the U.S.

Canadian Pipelines Support a Healthy Economy

For years, industry opponents have insisted that the TMX would bring about zero benefits for Canadians. However, as the dust settles after the pipeline’s completion, the results of having an additional capacity of 590,000 barrels of oil per day shipped to refineries and terminals in British Columbia and Washington State is becoming evident.

Analysis by the C.D. Howe Institute shows that with increased supply to an already tight and isolated fuel market, the potential to reduce wholesale fuel costs for B.C. Lower Mainland residents is likely.

A separate analysis estimates earnings from TMX oil shipments over the next 20 years could be as high as $38 billion ^[2], while the Bank of Canada predicted a 0.25 percentage point increase in second-quarter growth from the new pipeline. For a $3 trillion economy, that’s no small peanuts ^[2].

TMX’s completion has made clear that Canadian families cannot afford to miss out on job-creating energy resource development and the economic benefits that come with. Whether it be a new oil and gas pipeline in Alberta, a new hydro transmission line in Quebec, or a new liquefied natural gas (LNG) facility in Nova Scotia, Canadians can support all such projects to help create a stronger and more prosperous economy for our families and future generations.

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Join us today to learn more about the importance of Canada’s natural resources and the social and economic benefits that come with!

Canada’s Falling Productivity Eroding Living Standards, Attracting Private Capital a Solution. https://t.co/CxVFU00qRe

— Canada Action (@CanadaAction) August 12, 2024

SOURCES:

_{1 - https://www.cdhowe.org/sites/default/files/2024-08/E-Brief_357_v2.pdf}

_{2 - https://thehub.ca/2024/04/30/trevor-tombe-the-trans-mountain-pipeline-was-worth-every-penny/}