The Keystone Pipeline Fallout: Canada Makes Over a Billion New Friends

"If you do not change direction, you may end up where you are heading."—Lao Tzu

You can forget about energy independence for now.

Without Canadian oil it is nothing but the latest American pipe dream.

In the wake of the Keystone Pipeline decision, Canada has decided to play ball with China instead.

According to Canadian Prime Minister Stephen Harper, the U.S. reluctance to build the Keystone pipeline has caused his nation to increase the flow of oil headed west.

Instead of flowing south into the U.S., the same oil is now going to be headed to China.

"Look, the very fact that a 'no' could even be said underscores to our country that we must diversify our energy export markets," Harper said last week, referring to the Keystone pipeline decision.

"We cannot be, as a country, in a situation where our one, and in many cases, only energy partner could say no to our energy products. We just cannot be in that position," Harper said.

Considering that Canada is our No. 1 source of oil, Harper's decision could place a serious dent in the idea that the United States can become energy independent in the next two decades.

Energy Independence: Forty Years of Broken Promises

Of course, energy independence has been the goal for some time now.

Every U.S. president dating back to Richard Nixon has proposed his own "silver bullet" to get us there.

But once elected, few leaders seem willing to explain to Americans how this will happen, the costs that are required and the sacrifices that must be made.

However, as supply concerns become greater and conventional sources of crude grow increasingly scarce, Washington can't seem to get it right.

The larger truth is that the United States and its North American trading partners stand to benefit from the drilling breakthroughs we have put into the field in recent years.

With these new technologies, the United States actually has enough recoverable oil for the next 200 years, according to the Institute for Energy Research.

Shifting forward, the United States can drill its shale fields and obtain a greater share of resources from the oil sands of Canada. But we need to make these sources a priority over the medium to long term.

And Washington doesn't seem to be doing that. In fact, they're doing the opposite.

The current administration continues to tout alternative energy projects that won't become economically viable for many years. They also have pushed policy and stimulus measures that rely too heavily on shaky assumptions of economic growth and human behavior.

Oil and natural gas (and even coal) will be necessary tools to maintain and stimulate future growth. Like it or not, they will remain the cornerstone of current and future energy policy.

Yet today, China seems poised to benefit from the U.S. idea of oil as the energy source of the past.

The Keystone Pipeline: How to Profit on China's Good Fortune

Ironically, China adopted a similar energy policy to ours in the past.

It centers on securing as much oil as possible, from whatever source possible. But that has significant drawbacks, too. The Chinese exposed themselves to the perils of international diplomacy in unstable parts of the world, particularly Africa.

What raises the stakes in Canada is that our neighbor to the north offers one of the most important characteristics one could seek from a trading partner: long-term political and economic stability.

Canada's business-friendly climate, resource-rich environment and willingness to build infrastructure for its export markets are vital socioeconomic indicators of future success.

That may be why Chinese companies have already invested heavily in Canada's energy sector.

China's Sinopec made headlines in October when it agreed to buy Canadian oil and gas company Daylight Energy for a little more than $2 billion. Other companies, like EnCana (ECA:NYSE) and Progress Energy (PGN:NYSE), are considered potential buyout targets in the near term.

But speculation on potential merger and acquisition activity isn't the best bang for your buck as an investor.

We have to examine the companies poised for long-term growth that have increased cash flows and rising demand for the services.

This takes us back to our favorite part of the energy value chain: the midstream.

Midstream companies are the ones that connect the upstream companies (exploration and production) to the downstream markets (retail, refining and marketing).

Companies owning the pipelines that need to transport oil from the Canadian oil sands to new export terminals in British Columbia, or down to the United States, will see a steady increase in service demand over the long term.

We are still just entering the most profitable time in history for the energy sector, and investors who pay attention to these growing shifts in policy, technology, and supply constraints are well positioned to enjoy very happy returns.

After all, oil always seems to find an eager buyer. But you don't need to tell that to the Canadians.

Over a billion people on the other side of the Pacific are their new best friends.

James Baldwin, Money Morning