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The price of oil and Canada's boom-bust resource cycle

The recent collapse in the price of oil begs the question of whether Canada, yet again, is going to enter the bust phase of a classic boom-bust resource cycle. There is much to fear.

Earlier this year, the Canadian Centre for Policy Alternatives released a collection of essays marking the fiftieth anniversary of the publication of a Canadian economics classic, “A Staple Theory of Economic Growth” by Mel Watkins.

Building on the seminal work of Harold Innis, Watkins argued that the dominant theme of Canadian economic history has been development fuelled by external demand for and investment in the development of Canadian “staples” or resources, from fish and lumber, to wheat, minerals, oil and gas.

While exporting resources can generate great wealth, the danger of such a path is that a staples economy becomes overspecialized in raw material extraction to meet foreign needs, and runs up large external and domestic debts over-developing the resource base and associated infrastructure. These become hard to service if and when external demand collapses, setting the stage for widespread financial dislocation along with painful losses of jobs and output.

For example, the collapse of foreign markets for Canadian grain in the 1930s devastated the highly indebted prairie provinces, making the experience of the Great Depression in Canada even worse than in the United States or Europe. 

Watkins (who went on to author a major report on foreign ownership) called for conscious government policies to escape the “staples trap,” including measures to promote greater secondary processing of raw resources, to ensure that the input needs of the resource sector are met by Canadian based firms, and to build more technologically advanced non resource industries under Canadian ownership and control.

Partly in response to such concerns, Canada briefly embraced nationalist industrial development policies in the 1970s and 1980s that regulated foreign ownership, promoted national energy markets, and helped build up capacities in major manufacturing industries such as auto and aerospace and communications equipment.

Since about 2000, when non-resource exports peaked at about 50% of the total, oil and gas have emerged as the new economic motors of Canada. As with the classic staple industries, foreign ownership is high (about one half of assets) meaning that profits are lost to Canadians; processing of the resource is limited (we mainly export crude oil and bitumen as opposed to refined products and petrochemicals); and most of the machinery and equipment needs of tar sands development are sourced from outside of Canada.

Ironically, the rising share of oil and gas in Canadian exports has, due to the negative effects of the over-valued Canadian dollar on manufacturing production and exports, resulted in a large overall trade deficit. Even the resource boom has been insufficient to pay our way in the world.

To a degree, the oil and gas boom of the last 15 years was the logical result of high global demand and rising world prices. But contributors to the volume of essays reflecting on the contemporary relevance of Watkins argue that government policy went with rather against the flow of the market to help establish bitumen as the dominant new staple.

To build up Canada as an “energy superpower” oil and gas royalties were kept artificially low in the producing provinces; generous corporate tax breaks helped boost new investment in the tar sands; environmental standards have been lax, and environmental reviews have been  “streamlined”; First Nations claims to greater control of the land were bypassed; the Kyoto Accord and Canada's commitments to reduce greenhouse gas omissions were ignored and then abandoned; and the federal government has single-mindedly promoted foreign market access for Canadian energy as well as the pipeline infrastructure needed to expand exports.

In part these policies simply followed the logic of the integrated North American market in energy created by the free trade agreement and NAFTA. And it would have been difficult to counter the impacts of a high dollar and global pressures working against Canadian manufacturing.

But Watkins argued that governments should play a strategic leadership role in the economy, and shape rather than just blindly follow market forces.

The bitumen boom is now being undercut on more than one front. North American and indeed world prices are falling due to rapid growth in United States shale oil and gas production combined with a flagging global recovery. And the future viability of  tar sands expansion and proposed pipelines is threatened by serious domestic and international efforts to address the very real threat of global warming.

On top of the social licence at home needed to undertake major new export pipeline and resource developments, international efforts to reduce carbon emissions through carbon taxes, strict emission limits or other means may make further expansion of bitumen production non economic.

Prices may, of course, recover, and Canadians and the world may decide – unwisely – that we need not collectively act to reduce carbon emissions in a serious way.

But Canada may very well ending up needing a Plan B to create new sources of comparative advantage. This will demand serious reflection on how to build a more technologically sophisticated and innovative economy capable of creating high quality jobs in internationally competitive sectors.

This article originally appeared in The Globe and Mail.

Andrew Jackson is the former Packer Professor at York University and senior policy adviser to the Broadbent Institute.

Photo: pinkpurse. Used under a Creative Commons BY-2.0 license.


Photo: jubilo.  Used under a Creative Commons BY-NC-ND 2.0 licence.  - See more at: Pinkpurse. Used on a Creative Commons BY-2.0 license.