Thank you.
Good morning, Mr. Chair and members of the committee, and also to the other participants on this panel today.
I want to thank the chair and the committee for this opportunity to present on this very important topic. I think my comments will be found to actually complement and expand in some ways some of the comments already made by earlier speakers.
Just as no business executive would go about retooling a factory without first making a cost-benefit analysis, any assessment of the economic benefits of Canada's oil and gas sector must also consider any costs involved. Public policy is all about trade-offs, of which discussions about the oil and gas sector or energy in general are a classic example.
Oil and gas production is not only an economic issue. It involves serious questions of political power, Canadian sovereignty, and even democracy. It also involves important questions regarding the environment and the oil and gas sector's specific contributions to global warming.
Given the nature of these hearings and the limits of time, however, I will here concentrate primarily on several important issues dealing with the economic impacts. The end of this report provides some references that may be of use to the committee in its deliberations.
Oil and gas in their raw form are what is commonly referred to as “staples”, just as are furs, grains, and fish. Much of Canada's history is that of a producer of raw products for other countries. The Canadian economic historian Harold Innis argued that Canada's founding as a hinterland producer of raw exports for world markets curtailed normal economic and political development. His staples theory of development went further, however, in suggesting, contrary to mainstream liberal economic theory, that countries such as Canada would find it difficult to break out of what he termed the “staples trap”. The nature of the trap was that while staple products were often seductively profitable in the short term, their prices, set on world markets beyond local or national control, were inherently unstable and thus subject to boom and bust. Additionally, argued lnnis, an economy built upon raw resources alone did not develop the forward and backward linkages and social structure characteristic of a fully developed economy
Oil and gas production as it has evolved is clearly more complicated than the sorts of staples about which lnnis wrote, such as furs. Moreover, Canada' s economy as a whole is not a one-trick pony.
At the same time, the Canadian economy in recent years has experienced a structural shift in which exports have become, in the words of Clarke and others, “increasingly concentrated in unprocessed or barely-processed resource products” of which oil and gas constitute a major part. For this reason alone, the broad principles of staples theory, specifically tied to the costs and benefits of oil and gas production, still pertain.
There are a number of specific issues I want to talk on, and I'll go to those.
First is financial costs. Resource development, especially in the oil and gas sector and more so in the Alberta oil sands, is particularly capital-intensive and requires a long time horizon. The potential of huge profits to be made through this private capital investment is matched by the potential of huge losses should the investment not pay off. In practice, this has meant government backstopping these investments—in effect, the public becoming the end holder of risk.
Next is employment. The oil and gas sector contributes considerable money directly to the state through either provincial royalties or corporate taxes, and indirectly through employee wages. Much of the employment involved in oil and gas production is indirect, however, tied to construction work, as we've heard, and to infrastructure or servicing.
This is particularly the case with current pipeline proposals, in which the bulk of jobs exist in the beginning stage of pipeline construction. To put oil and gas sector employment in context, Clarke et al. note that, “although 16,500 mostly well-paying direct jobs were created in the petroleum industry (mostly in bitumen-related developments) in the decade ending in 2011, this amounts to less than 1 percent of all the new jobs generated by the Canadian economy during this period.” One way of maximizing the employment benefits of oil and gas production would be though increased value-added production.
Next is upgrading or value added. The Alberta Federation of Labour, the Parkland Institute, and other groups have lobbied for the domestic upgrading of bitumen, as opposed to the export of raw product to the U.S. via the Keystone and other pipelines, in order to maintain value-added jobs in Canada.
Pipeline supporters, by contrast, argue that building capacity in Canada for domestic production is too expensive and that in any case Canada has huge amounts of available bitumen that might as well ship to the southern U.S., where upgrading capacity already exists.
Then there is pacing. Rapid development means, as already stated, a lot of construction jobs. The downside of this is enormous expense to the public purse, the attendant costs of social adjustment in many instances, and accelerated production of a non-renewable resource. The Parkland Institute has repeatedly suggested that greater long-term benefits would accrue to Alberta and Canada as a whole through a slower pace of oil and gas development.
Next is “crowding out"—economic trade-offs, in other words. Every economic development involves an investment of resources, including land, capital, and labour, the precise amounts of each depending on the type of enterprise and the stage of development. Any investment by an enterprise in oil and gas risks coming at the expense of investments that might have been made in other activities, including alternative energy.
Then there are multiplier effects. Some of the costs of investment in oil and gas are offset by gains in either backward or forward linkages, sometimes also referred to as multiplier effects. There is considerable economic activity in Canada related to manufacturing and services. Nonetheless, many of the indirect benefits of oil and gas production occur outside Canada. Foreign—primarily American-owned—companies make up 71% of the oil and gas companies operating in Canada and tend to source in their home countries. In short, at least some of the spinoff benefits and profits of oil and gas production leak out of the Canadian economy.
Next is oil price volatility. The direct economic benefits of oil and gas production can be enormous when the price of oil is high. But like all staple resource products, oil and gas is a notoriously volatile commodity. The price of oil has varied between $17 in 1999 and $145 just prior to the recent recession. The resultant booms and busts have real political and social consequences upon staples-based economies, something Alberta knows very well. But this volatility also has impacts upon the Canadian economy as a whole and arguably upon the Canadian dollar.
What about the Canadian dollar volatility? The impact of the price of oil upon the Canadian dollar is difficult to calculate and even more difficult to predict. An Enbridge study prepared for the northern gateway project argues that the value of the dollar will hit 85¢ by 2016 and remain there for 30 years. But a study by the Canadian Energy Research Institute in 2011 predicts that the Canadian dollar will rise to $1.23 by 2030 and $2.00 by 2044. The volatility and unpredictability of the dollar has negative consequences for oil and gas production and for the Canadian economy as a whole.
There are externalities. Externalities are those costs not built into the actual pricing of a commodity or product. Current economic thinking suggests that the end price of an economic activity should reflect—that is, internalize—the real costs of that activity. These often-externalized costs include the environment, but can also be seen to include such things as the costs of health, education, retraining, and infrastructure, as well as other social costs incurred by individuals, families, and communities impacted by oil and gas and other economic activities.
Finally comes income inequality. The economic benefits and costs of any activity may not be evenly distributed across or within populations or regions. Alberta has the highest median income in Canada, but a Statistics Canada report in 2012 showed that the bottom 90% of Albertans have not seen a real income rise in roughly 30 years. That's partly because of the effects of inflation, which rapid staples-based resource development tends to actually increase, and so it eats away at the value of the wages that people earn.
That's the end of my presentation, and I certainly welcome questions from the committee.
Thank you.
