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Canada's Saudi spat and oil's new world order

Canada's relations with the oil superpower have taken a turn for the worse

It all started with a tweet.

In 280 characters, Canada's Global Affairs Ministry unleashed one of the fiercest diplomatic clashes with Saudi Arabia in memory. A seemingly innocent plea to release "peaceful" female human rights activists was met with a decidedly undiplomatic response.

The reaction was immediate and swift—and unexpected in its ferocity. Crown Prince Mohammed Bin Salman expelled ambassadors, suspended all flights between the two countries, revoked visas and ordered the liquidation of all Canadian assets. A Saudi youth group went as far as to post a disturbing image of an airliner colliding with the CN Tower in Toronto in an apparent 9/11 style attack.

Although the dispute is ostensibly about human rights—several of the activists have since been sentenced to death—the spat has broader repercussions for two of the world's largest oil reserves holders.

In one corner we have Saudi Arabia, the undisputed oil heavyweight of the world, at 11m barrels a day and the planet's largest oil exporter by far. In the other, we have Canada, a relative featherweight at 4m b/d—but an up and comer with arguably the second largest reserves.

Even though it produces barely a third of the Kingdom, Canada has something the Saudis don't — nearly half of the US import market. At 3.5m b/d, Canada has nearly quadrupled its market share in the world's largest oil consumer in less than two decades, almost all at the Saudis' expense.

Given increases in US Lower 48 shale output, combined with falling North American demand, Canada now supplies about 40% of all US imports in any given month, a figure which continues to rise.

Position management

This is a point not lost on the Saudis, who once enjoyed practically unfettered access to Gulf Coast refineries. They are now finding that dominant position eroding at the prospect of pipelines such as the Keystone XL which would reduce another 1m b/d of (mostly) Saudi imports.

Some analysts suggest the US could easily replace all Saudi imports with its own production, which is running at a post-WWII high in excess of 10m b/d and is expected to exceed Saudi figures later this year. This would further erode the Kingdom's once dominant position in the US market.

With market dominance, comes political power. Since the 1970s the Saudis have enjoyed disproportionate diplomatic access in Washington, over and above its position on the world stage. And make no mistake, they are astute diplomats and business people. As its market dominance dwindles, so too does its diplomatic leverage vis-a-vis existential threats such as Iran.

It's hardly a coincidence Saudi is becoming increasingly aggressive as the US threatens to essentially shut in Iran. The Islamic Republic also happens to be an Opec member and alternatively the fourth or fifth largest oil producer in the world—after Canada. Saudi promises to make up any shortfall are clearly designed to curry favour with the American administration and shore up its influence at a time when Canada-US relations are strained with trade disputes and personal attacks between its leaders.

Which brings the argument full circle. What else to make of all this bicker and banter?

Politically, Canada is naive. Prime Minister Trudeau cuts a good image of Canada in foreign capitals as a modern and progressive leader, a defender of human rights. It is within his wheelhouse to lecture Saudi on womens' rights. But call it what it is: grandstanding.

It’s a problem that could easily be solved with a pipeline to the East Coast of Canada— which can’t get done, because of the policies of the prime minister himself.

Even US officials have admitted as much by refusing to take sides in the dispute.

At the same time, Trudeau seems to fail to grasp the significance and political power that comes with having the world's largest bilateral trading relationship with the US. Or the role of Saudi Arabia as Canada's biggest competitor in the US market.

Yet he continues to get bogged down with the North American Free Trade Agreement (Nafta), pipelines and verbal battles with President Donald Trump. The Saudis must be shaking their heads in disbelief at Canada's perceived meddling in their internal affairs. As the Prophet says, "leave that which does not concern you".

To add insult to injury, Aramco practically mocked the prime minister with the laughable suggestion that it wouldn't shut off oil exports to Canada. Even though Canada is a large net oil exporter, it still imports about 0.75m b/d through Quebec and the Maritimes. Barely 60,000 b/d or less than 10% come from Saudi. By comparison, a single mid-sized Calgary oil producer easily produces 60,000 b/d.

It's a problem that could easily be solved with a pipeline to the East Coast of Canada— which can't get done, because of the policies of the prime minister himself.

Threats to pull Saudi investment and purge assets are even more bluster. According to Statistics Canada, an information arm of the Canadian government, total bilateral trade between the two countries was about US$4bn in 2017, with more than half the total comprised of crude imports which amount to 99% of all Saudi exports to Canada.

The amount of direct foreign investment is not available, which suggests it may a paltry number. Aside from the Fairmont chain of hotels—including the Chateau Frontenac in Quebec City—Saudi really doesn't have any significant assets in Canada.

Saudi's National Commercial Bank reportedly held investments in 41 Canadian firms, including oil sands producers Canadian Natural Resources and Suncor Energy. However, the largest Canadian holding in its $148.2 million AlAhli North America Index Fund was in Canadian National Railroads, worth a meagre $473,000—less than a high test Ferrari. Given the Kingdom's control over its oil sector, reciprocal Canadian investment is likely to be even less.

The incident seems counter to MbS's drive to open the Saudi economy and increase global investment flows to his country, which according to UN figures fell to a 14-year low in 2017. But the frustration in raising capital appear hardly surprising given the knee-jerk reaction to relatively minor players such as Canada.

When this writer covered the Third Opec Summit in Riyadh in 2007, he asked then oil minister Ali Al-Naimi, why Aramco doesn't invest in the oil sands or the "sands of oil" as he called them, especially given its extensive refining portfolio in the US Gulf Coast? The question was purely rhetorical, but the response was perhaps not surprising after he openly laughed out loud and proclaimed Saudi the best, lowest cost producing nation on Earth and Canada the most expensive barrel on the planet—by far.

It was carried in the Saudi press like it was a joke. Even back in Canada, there was as an implicit threat that the Saudis could shut down the Canadian oil industry at their whim. Oil hit $100 a week later, presumably by their good graces.

Which underscores the crux of the confrontation and why it's so important for the Kingdom to put Canada in its place over a relatively trivial issue. Saudi wants—needs—high oil prices to backstop its own economic ambitions. But by doing so, it keeps Canadian upstarts in business and ensures unwanted competition for its high cost barrels.

Nobody's laughing now.

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