Good thing for those U.S. engineering companies there are no “Buy Canadian” provisions in oil sand contracts like there are “Buy American” provisions in U.S. federal procurement.  But U.S. oil companies may soon find a less hospitable political landscape north of the border. After Obama sandbagged TransCanada, and all the Alberta producers that were going to supply it, I wouldn’t want to be a U.S.  pipeline company looking for regulatory approval in Canada these days

When it comes to energy markets things can change in a hurry.  No doubt rainmakers in Calgary’s Petroleum Club are already starting to brush up on their Mandarin. How the goal posts have moved.

It wasn’t that long ago when I was chief economist at CIBC World Markets that Alberta government officials would tell me in no uncertain terms the province wasn’t looking for investment from state-owned oil companies.

Since then, China’s state owned refining company, Sinopec paid more than $4.5 billion for a 9% stake in Syncrude, the largest oil sand producer in the province. Similarly, State owned Petro China spent about $2 billion acquiring full control of the Mackay River project from Athabasca Oil Sands Corp..

State owned Chinese energy companies are not pouring billions of dollars into developing Alberta’s oil sands so more synthetic crude or bitumen can be sent to refineries in Cushing Oklahoma. While the sudden about turn by the Obama Administration may have been a rude awakening for some folks in Calgary’s Petroleum Club, in the end it only serves to reroute Canadian oil to where world markets will ultimately dictate that it flow.

Prime Minister Harper once remarked it was a no brainer for the Keystone XL pipeline to connect Alberta oil sand product to supply U.S. markets. Looking at geography, it is easy to understand the remark. But looking at where market growth will occur, the Prime Minister’s sentiments are misguided.

U.S. gasoline consumption continues to fall, and it is now down to the lowest levels in more than a decade. The future of the oil sands lies with the growth of oil demand in Asian markets, not in American ones. And that future, more than any regulatory decision in either the United States or Canada, will depend on the price of oil.

As I argued several years ago in my book, “Why Your World Is About To Get A Whole Lot Smaller”, triple digit oil prices will redefine our notion of an economic recovery because as soon as the global economy picks up, oil prices will quickly soar to levels that challenge growth.

Last year was a case in point. In the second full year of recovery from as deep a trough as any seen in the post-war period, oil prices once again rose swiftly to levels that, in the past, torpedoed economic growth.

Brent Crude, the world oil benchmark, averaged $111 per barrel. This cracked the previous record of an annual average high of $100 in 2008 – a peak subsequently followed by a huge global recession.

The North American benchmark, West Texas Intermediate (WTI), rose even more, increasing by 20% from its 2010 average price of $79. Even with the hefty discount that it traded to world oil prices throughout most of last year (at times over $20 per barrel), WTI still averaged just a shade under triple digit levels at $95/barrel last year.

Of course, there are always special factors to explain these price levels: the Libyan revolution, Iran’s threat to close the Strait of Hormuz, or an increasingly destabilized Iraq.

While all these events certainly pose credible threats to world oil production, they are, at the same time, background noise even if they dominate the front page.

The real story behind triple digit oil prices is not the threat of supply shocks, but the sheer, unrelenting rise in world oil demand.  Already closing in on 90 million barrels a day, the quick rebound in world oil consumption to new record highs demonstrates the global economy can’t grow without burning greater amounts of oil.

No matter how many rabbits the oil industry can pull out of its hat, be it tar sands from Alberta or shale oil from the Bakkens, supply just can’t seem to keep pace – at least not at the prices most consumers can afford to pay. That is the message that triple digit prices keeps telling us.

If the global economic expansion, troubled as it may be, continues, we will see even higher oil prices in 2012. But what does that say about the sustainability of growth?

And even if there is growth, what is the pace?

With the spectre of default now hovering over major European economies such as Italy and Spain, the potential liability for German and French taxpayers becomes staggering. This is why they are now insisting on a rewrite of the terms for the monetary union. Having already lost their monetary sovereignty, the debt laden PIIGS will soon be asked to surrender their fiscal sovereignty as well.

German taxpayers will never agree to common issuance of Euro bonds with profligate and undisciplined spenders unless they have direct control over those countries’ budgets. Nor will they cough up anywhere close to would be required to bail out Italy or Spain if either loses access to the bond market.

But Italians, like their Hellenic neighbors, will soon realize the futility of complying with these demands. Since Italy’s problem is its outstanding debt as opposed to simply its current budget deficit, there is no fiscal course of action it can take that will satisfy the bond market.

Even if Italy could miraculously balance its budget in a contracting economy, the accomplishment would make a negligible difference on the country’s sky-high ratio of national debt to GDP or the amount of money it has to borrow next year.

The idea of Germany and other creditor nations dictating even harsher deficit reduction measures for countries such as Greece and Italy may sound reassuring to market, but for people in the streets of Athens and Rome, it sounds like nothing short of serfdom.

As that option is politically rejected, bond yields on Italian and Spanish debt will once again rise to thresholds their governments simply can’t afford to pay.

Unless the European Central Bank is going to engage its own form of quantitative easing and start printing billions of euros to buy up long dated Italian and Spanish bonds, the end is in sight for the European Monetary Union as we know it.

The longer creditor countries try to save the PIIGS, the closer the debt crisis is coming to their home markets. Standard & Poor’s has already put the remaining six AAA rated countries in the European monetary union – Germany, France, The Netherlands, Austria, Finland and Luxembourg – on credit watch, which is normally a prelude to a downgrade.

As interest rates in creditor countries start to rise, the appetite for further bailouts will diminish just when huge borrowers such as Italy and Spain turn to their Eurozone partners for funding.

The end game seems pretty clear. The European monetary union will, of course, survive in some form. But the next time you go to Europe, don’t be surprised if you see the drachmae and the lira back again with a new lease on life.

This is a lesson European bondholders have already learned. And it is one that will likely unfold in the U.S. Treasuries market, the supposedly safe haven from the panic gripping European bond markets these days.

In Europe, holders of sovereign debt have already seen how soaring debt levels crush bond prices. Bond yields soared to over 20% on Greek debt as bond holders were compelled to take a voluntary 50% haircut on the face value of their bonds.

While technically not a default, the 50% markdown of the value of Greek bonds is no different than a default for the country’s short-changed creditors. Even worse, since the markdown on the value of the bonds was voluntary, credit default swaps bondholders bought to insure against the risk of default offered no protection at all.

Looking at what happened to Greek bonds, it is not difficult for global fixed income   markets to worry that Italian or Spanish bondholders will be soon asked to take similar voluntary haircuts. Both countries’ bond yields are approaching the 7% threshold that saw Portugal, Greece and Ireland exit the bond market and turn in desperation to their Eurozone partners for bailouts.

While Italy’s deficit is modest-sized, its debt is huge. It is the largest in the Eurozone, measuring in excess of the country’s gross domestic product. Should it or Spain require the same kind of assistance Greece, Portugal and Ireland have already received, markets fear the Reichstag will once again demand a pound of flesh from bondholders in exchange for further financial assistance from German taxpayers.

That may well explain the flight of capital from European bond markets, but it hardly justifies where the money has been fleeing.  The flow of capital pouring into the U.S. Treasuries market pushed 10-year yields recently below two per cent.

But the debt laden U.S. Treasuries market is an unlikely sanctuary from Europe’s fiscal problems. The U.S. federal debt-to GDP ratio has almost doubled to 74% over the past couple of years.

And America’s debt ratio is only going higher in the near-term. With the so-called Super Committee in Washington striking out on a last minute bipartisan effort on a deal on future budget cuts, it is safe to say that America’s huge budget deficit isn’t going to be getting any smaller until after next year’s presidential elections. By that time, Washington will have just run up another trillion dollars or so of debt.  That’s hardly a sanctuary from default risk.

Not only has deadheaded oil in Cushing Oklahoma, the present terminus of the pipeline, put a crimp on expansion plans in the oil sands, but the ballooning price spread between West Texas Intermediate (WTI) and world oil prices has cost Canadian producers more than $1-billion a month in lost petro-dollars.

It’s not U.S. motorists pocketing the difference at the pumps. Midwest refineries have been quick to recognize a gift horse when it is staring them in the face.

The only thing bigger than the gap in oil prices between Cushing (where WTI is priced) and the Gulf Coast is the gap in refinery margins. Refinery margins, or crack spreads as they are known in the oil industry, refer to the price difference between what refineries pay for their feedstock (crude or bitumen) and the price they charge for the products they, in turn, sell such as gasoline or diesel.

While refineries in Cushing pay WTI prices for their feedstock, refineries 400 miles south pay about $20 per barrel more for Light Louisiana Sweet, which like all fuels heading into U.S. ports, trades at or near the Brent-based world oil price. Incidentally, those prices have been in triple digit territory since the beginning of the year.

That is a great deal for the refineries in Cushing that get a crack spread of around $25, compared to a spread of about $5 for those that have to pay Brent-type world oil prices for their fuel.

But for Canada’s oil patch, which exports more than two million barrels a day to the U.S., the $20 or more price discount that has prevailed all year amounts to $40 million a day, or about one and a quarter billion dollars a month in lost petro-dollars.

I bet shareholders of Canadian oil producers, not to mention provincial and federal governments in Canada, would like to see their share of the rich crack spread that mid-western refineries are getting on their Canadian feedstock.

Without pipeline access to the Gulf, or to the Pacific to supply Chinese customers, Canadian oil producers get what Mid-west refineries will give them. And that’s a huge discount to what the rest of the world will pay, including U.S. refineries along the Pacific, Atlantic or Gulf coasts.

It doesn’t make sense for Canadian oil to flow to the market that values it the least.  If Canadian oil exporters can’t get to world prices through the proposed Keystone XL pipeline to the Gulf of Mexico, they must find another route for their oil to flow.