By Duff McDonald
February 15, 2012

FORTUNE — The world has turned upside down. First, despite a decade-long exercise in hand-wringing about reducing American dependence on the oil of, shall we say, “unfriendly” governments, the U.S. just put the kibosh on a deal with Canada — a deal that would have built a 1,661 mile, 36-inch pipeline to send oil from Alberta through Saskatchewan, Montana, South Dakota, Nebraska, Kansas, Oklahoma to be refined in Port Arthur, Texas. Whatever you think about Canadians, they are not an unfriendly people. Called Keystone XL, the project was turned into a political football, and President Obama walked away from it for fear of enraging the environmental left.

This despite the fact that the project was projected to provide a $7 billion economic stimulus and create 20,000 high-wage manufacturing jobs during its construction. In Texas, the project was projected to provide 50,365 person-years of employment and $41.1 million in state tax revenues. Even Montana, at the other end of the spectrum, might have enjoyed 5,531 person-years of employment and $7.5 million in tax revenues. It’s not like people are looking for jobs these days, though, is it?

But let’s get back to the world turning upside down. It used to be that the U.S. was the economic engine of this continent. Canada rode sidecar to its much larger and more powerful neighbor. And that’s the way it went. Well, the U.S. economy is in the crapper, and Alberta—home to the proposed pipeline—is a landlocked island of prosperity amidst otherwise disastrous western economies. Economic growth is projected to be 3.8% in Alberta in 2012. You can’t get a hotel room in Calgary these days if you don’t book at least two weeks in advance. You can probably get one for this evening in New York City.

A third reversal? When the U.S. blew off the Canadians after years of work to get this pipeline going, the Canadians didn’t just sit idly by and wait for U.S. political gridlock to resolve itself after this fall’s election. Instead, Canadian Prime Minister Harper was suddenly in China, glad-handing that other world power and talking about just what it would take to get Canadian oil to the Far East. caught up with Alberta Finance Minster Ron Liepert earlier this week to get a sense of what this upside-down world looks like from the Canadian perspective.

How do Canadians feel about the collapse of the Keystone initiative?

Let’s start with the demand side. The U.S. imports somewhere in the range of 10 million barrels of oil a day. Seventeen percent of that is coming from Canada at the moment. But we have the ability to supply a lot more of the U.S. imports and not have you be reliant on…you name the place, but it’s probably not as friendly as Canada. But you have to allow us to get it to you. We recognize that Keystone has been caught up in political gridlock in this country. It’s out of our hands. But we also believe that there’s a good chance something might happen after the election. And if it’s not Keystone, it’s going to be something else.

What does that mean? What might “something else” be?

There is a lot of talk in Canada about “reversing lines.” Currently today, as strange as this might sound, we have imported oil that comes into the east coast that is then refined in Sarnia, Ontario. And Albertan oil is going south. It’s just economics. Now we’re talking about reversing that line — taking western oil for usage all the way to the east coast. That would open up the potential for lines from eastern Canada to head into the eastern U.S. We will find some way of making it work if Keystone continues to be caught up in politics.

Evironmental groups helped kill Keystone. But whether or not the U.S. wants to, they’re going to need to deal with the tar sands for years to come, right? You’ve got all the oil.

You’re absolutely correct. We’re currently sitting on the third-largest proven reserves in the world. With technology advancement over the next ten years, we will have the largest proven oil reserves in the world, ahead of Saudi Arabia. “Proven reserves” is calculated by determining you can economically pull out of the ground. Right now only 10% of what we know is there is considered “proven.” But with any tweak in technology, that goes to 15%, and at that point, we have largest reserves in the world.

Which makes you the obvious target for environmental groups.

Indeed. If I am part of an organization that wants to rid the world of fossil fuels, I may as well put my target on the place that is the largest obstacle, which has largest proven reserves in the world.

Your Prime Minister made a fairly quick visit to China shortly after Keystone was quashed. Was it just a social visit?

It wasn’t just about panda bears, I can tell you that. The intent of that trip was to send this message to China: “You are a major investor in our country, you need our product, we have excess product, and we want to get it to you.” It’s as simple as that.

Today, Alberta exports 1.5 million barrels a day. Just with production that is coming on-stream, we will be exporting between 4 and 5 million barrels per day by 2020. That’s a huge jump. The U.S. could consume it all. But we don’t want to rely on just one customer. By 2020, all things being reasonable, the U.S. will be a larger customer of ours, and we will be supplying a larger portion of your oil than at any time in history. But at the same time, we will be opening up global markets for our product.

Sounds like a great negotiating position to be in.

I think we have a very good example of what can happen when you look at natural gas. The vast majority of Canadian gas has been sold to the U.S. And if you combine the price of gas and exchange rate, our revenues from gas sales were about $5 billion five years ago. This year, they will be $1 billion. The discovery of shale gas has driven down prices and taken away our only customer. We now have four proposals to get liquefied natural gas to our west coast to send it abroad. We will be opening up, for our producers, the ability to get international prices for gas, which are three to four times what we get in North America. We relied on one customer, but the U.S. domestic supply exploded, they don’t need us as much, we are stuck with all of our gas at giveaway prices. We can’t let that happen with oil.

You’re a politician. How do we end the politics of what seems a win-win situation for both countries?

At your end? You tell me. The roadblocks are indeed political. But all you have to do is set the politics aside and look at the economics. Take oil. You’re importing 10 million barrels a day at Brent prices. The Saudis are not selling you oil at WTI prices. Brent is almost $20 a barrel more than you would be paying for oil from us. How the hell does that make any economic sense? It’s a no-brainer that we find a way to get more business done.

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