Hewers of Wood, Pumpers of Oil and Gas

The Dominion Institute has recruited twenty great Canadian thinkers to write about what the country might look like in 2020. The fourteen essays currently posted include Don Drummond’s neo-classical analysis of manufacturing and productivity and Jim Stanford’s excellent analysis of Canada’s reliance on natural resources.

Jim’s main argument, that Canada’s unmanaged resource boom is damaging other industries and our natural environment, is quite compelling.

However, for the sake of discussion, I have a couple of minor quibbles. Jim writes that “in the long-term real resource prices tend to decline due to technological improvements in extraction and processing. That trend will almost certainly reassert itself. If Canada’s economy has become too dependent on resources in the interim, we will pay a big price.”

If commodity prices are uniquely high, then now might be the best moment for Canada to extract and sell its resources. My view is that, since oil and gas exist in finite quantities, their prices are likely to rise in the long term. In fact, non-renewable resources are the classic “increasing cost” industry: as cheap, accessible reserves are depleted, extraction shifts to more expensive sources. To some extent, the technological improvements of which Jim writes will occur only in response to higher commodity prices.

The implication of rising oil and gas prices is that Canada need not hurry to extract and sell its finite reserves. Indeed, leaving more of them in the ground might be a wise investment.

Jim also writes that “In 1999, exports accounted for more than 43 per cent of Canada’s GDP.” Don Drummond writes that “Exports account for 69 per cent of Ontario’s GDP” (this number must include inter-provincial trade). As Jim knows, inflated trade statistics are my pet peeve. These percentages compare gross exports, which include imported content, with GDP, which includes only value added in Canada. Value-added figures indicate that international exports account for about one-quarter of Canada’s GDP and one-third of Ontario’s GDP.

Since imported content is concentrated in manufactured goods rather than in natural resources, factoring it out reveals that Canadian exports are even more dependent on the latter than Jim’s figures imply.

 

In conclusion, I agree with Jim that unfettered resource extraction is a major economic problem for Canada. My proposed solution is higher royalties and taxes on resource extraction, an approach that would derive greater public benefit from this extraction and help slow it to a more sustainable pace.

One comment

  • Hi Erin;

    Thanks for your thoughtful reading of my piece for the Dominion Institute.

    Your points on whether or not resource prices tend to fall (in real terms) in the long run are good food for thought. The long-term trend is clearly negative — even for oil — although there are certainly blips along the way. Perhaps that is now changing as a result of the global economy confronting genuine limits to growth. I’m not sure (and recall that similar predictions were made in the 1970s).

    Regarding the regular mis-use of export/GDP ratios: Erin’s work on this subject is the best there is, and you are quite right to challenge its use. My point was merely to show that even by this measure, Canada’s economy seems to have been de-globalizing. But I should indeed be more careful in pointing out the limits of this particular measure, and thanks for drawing it to my attention.

    I am 100% with Erin’s proposed increases in resources royalties. Right now private companies are colleting windfall one-time rents from a resource that the people, not them, actually own. Alberta’s near-nonexistent royalties on oil sands production are downright sinful (and I’m not even religious).

    Best wishes, Jim Stanford

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