Social Policy in Ontario

Why oil (not cars) drives the economy

Posted on February 7, 2011 in Debates

Source: Globe & Mail — Authors: Barrie McKenna

TheGlobeandMail.com – ROB
Published Sunday, Feb. 06, 2011. Last updated Monday, Feb. 07, 2011.   Barrie Mckenna, Ottawa

Kriska Transportation president Mark Seymour knows exactly what happens when the price of oil pushes $100 (U.S.) a barrel. Trucking companies like his hike their fuel surcharges – and Canadians pay more for all the things they buy.

“The bottom line is that it dramatically affects the price of goods to the consumer,” said Mr. Seymour, whose company runs 400 trucks from its headquarters in Prescott, Ont.

The oil price spike is producing a typical showdown between energy producers and consumers. But this isn’t a return to 1980, when Ottawa tried unsuccessfully to shift wealth from drillers to guzzlers via the National Energy Program, setting up a brawl between Alberta and the rest of Canada.

This time, the entire country has evolved into a petro-dollar economy. Canada’s fortunes – and its currency – are now more closely tethered to oil than any other industry, including autos, forest products or agriculture.

Vast swaths of the Canadian economy thrive when the price of crude is high, and not just in Alberta’s oil patch. From steel fabricators in Quebec and Ontario, which supply Western Canada’s giant oil sands projects, to Newfoundland oil workers to investors everywhere, $100-a-barrel crude means more work, and more wealth.

“We’re an energy-dollar economy, and we’re functioning better when we’re exporting a lot of it to our neighbours to the South,” explained Peter Howard, president of the Canadian Energy Research Institute (CERI) in Calgary.

The oil and gas sector is now the dominant industrial contributor to Canada’s economy, and by a wide margin.

And Mr. Howard predicts the sector’s contribution to the country’s gross domestic product will rise from 11 per cent to nearly 15 per cent this decade as production from the oil sands ramps up.

Unlike drilling for light crude, tapping the oil sand’s heavy crude is labour and capital-intensive. And those benefits inevitably flow through to the rest of the economy through jobs, purchases, investment and expanded wealth. By 2020, the oil sands industry is expected to add three percentage points to Canada’s economic growth plus an average of 540,000 jobs a year – 44 per cent of those outside Alberta. CERI estimates the industry will buy $170-billion worth of goods and services from other provinces over the next quarter-century.

Canada has also become an oil trading nation. Crude accounts for 20 per cent of Canadian exports, double its share in 2000. Cars and parts, meanwhile, make up just 14 per cent of exports, down from 25 per cent as recently as the mid-1990s.

“Oil and autos have basically swapped places,” pointed out Bank of Montreal deputy chief economist Doug Porter.

While it may not mark a return to the enmity of the eighties, the shift does have political ramifications. The energy-producing regions of the country gain wealth, population and influence. And some of the traditional haves of Confederation, including Ontario, look increasingly like have-nots, tied to a shrinking manufacturing sector.

Economic power is shifting, and the trend will “continue and gather momentum” as oil sands production increases over the next couple of decades, BMO’s Mr. Porter said.

“As people move, so does the political power,” he argued.

While much of the country is awash in red ink, Newfoundland and Saskatchewan are headed for budget surpluses this year, thanks to rising resource royalties.

“No matter how you present the information, it creates tensions within the country at the federal-provincial and intergovernmental level,” said Robert Roach, director of the West in Canada project at the Canada West Foundation in Calgary. “It creates tension just like it does when some people are rich and others aren’t.”

Over the long-term, high prices could also kill the golden goose. The danger is that $100-a-barrel-oil causes “demand destruction,” marginalizing higher-cost oil sands production as consumers seek out alternatives forms of energy, Mr. Roach said.

“At some point, people and governments will spend the money to go to alternatives,” he said, “and that’s not good in the long-term.”

That’s why many in Western Canada are now pushing for a more cohesive national energy strategy. As the Canada West Foundation put it in a recent policy paper, Canada must come “to grips with how we produce and use energy.” High prices, the group says, puts constraints on resources and infrastructure, while new developmenthighlights the oil sands’ environmental and climate challenges.

Among the leading advocates of a more cohesive national strategy is Bruce Carson, Prime Minister Stephen Harper’s former policy director and now executive director of the Canada School of Energy and Environment at the University of Calgary.

“There’s a general recognition among Canadians that the main driver of the economy is the energy industry,” Mr. Carson said. “So we better look at how to pull the various parts together.”

The reality of being a petro-dollar economy is that Canadians may well have to live with a high dollar for an extended period. This, of course, benefits vacationers, cross-border shoppers and companies looking to import foreign-made equipment.

But a lofty loonie is a threat to manufacturers who depend on exports, and most of them happen to be in Ontario and Quebec. Beyond the high dollar, manufacturers also face a sluggish U.S. recovery and new competitive threats from China and other low-cost producers.

“The economic landscape that’s been handed to Canada is friendly to Western Canada and unfriendly to Central Canada, particularly Ontario,” BMO’s Mr. Porter said.

And that could well stir up talk of redistributing the wealth – taking money from one region and moving it to another, said Andrew Leach, an economist at the University of Alberta.

“It’s a conversation we need to have, but I don’t think it’s going to be smooth,” Mr. Leach said. “We can’t have the country pulling itself apart over issues like the oil sands.”

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Tags: economy, globalization, standard of living

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