Not-so-gross domestic product
Why the oil sands' economic impact really is as big as you'd think – and bigger than what others seem to believe
When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at firstname.lastname@example.org
by Max Fawcett
When it comes to assessing the impact of the oil sands on Canada’s economy, the truth seems to be in the eyes of the beholder. Take a recent piece by Daniel Tencer, business editor at Huffington Post Canada – the title of which heralds that “Oilsands’ Economic Impact Is Not As Big As You’d Think.” In it, Tencer parses a recent IMF backgrounder on Canada and pulls out some evidence that suggests the impact of a rejection of Keystone XL, and other market-access issues, won’t be a major drag on economic growth. “In a scenario where oilsands [sic] growth were to be limited, by something like the rejection of the Keystone XL for example, Canada’s GDP would only be 0.5 percentage points lower 10 years from now than it would otherwise have been.” And, Tencer writes, “even on the jobs front the numbers are less than impressive,” noting that employment in the energy sector increased by less than 13,000 jobs between 2007 and 2012.
There is nothing overtly deceitful in the way Tencer presents his facts. But they are deprived of context, and that matters here. With respect to jobs, the period in question happens to be one in which the biggest economic dislocation in nearly a century (the great financial crisis) took place, and one in which the price of oil crashed from an all-time peak near $150 per barrel. Natural gas, meanwhile, which happens to be more labour and service-intensive than oil, swooned from nearly $10 per mcf in June of 2008 to $1.58 in May of 2012. That the energy sector created any net jobs at all is a miracle when taken against that backdrop.
But more to the point, Tencer using job creation as a proxy for economic virtue makes no sense in a province like Alberta. Here, the labour market seems perpetually strained. And more broadly, the primary purpose of economic policy isn’t to create jobs, it’s to create wealth. If we wanted to do the former, we’d create a bucket brigade in order to get the oil to international markets – as the University of Alberta’s Andrew Leach pointed out in one of the best pieces of economic satire (only pieces?) the Globe and Mail has published in recent years. And make no mistake: the energy sector has created wealth. As the IMF report says, “adding the direct contribution to growth of the unconventional oil and gas sector to that of the most closely related industries suggests that the overall impact of the energy sector is significant (close to one-third of cumulative GDP growth over 2007–13.”)
What of the fact that, as Tencer writes, a dollar invested in the oil sands generates a 90 cent boost to Canada’s GDP [a higher multiplier than that generated by investment in manufacturing, for what it’s worth], with 82 cents of that going to Alberta and only four to Ontario? Well, where else would it go? Alberta doesn’t benefit much from Ontario’s manufacturing sector. And while the rising Canadian dollar has been fueled in recent years in part by the strength of Alberta’s energy sector, that same sector could also make life easier for Ontario’s beleaguered manufacturers – if the government lets them. “Canada’s internal market remains segmented, as refineries in eastern Canada are not connected with pipelines to western Canada and import much of their crude oil at the higher global (Brent) price,” says the IMF report. “This has not only a direct negative impact on Canada’s energy trade balance, but potentially also an indirect one as it limits the competitive boost that Canadian manufacturing firms could derive from accessing a cheaper, domestic source of energy.”
Finally, what of the notion that the rejection of Keystone XL would only clip national GDP by 50 basis points? As the IMF report notes, that would just be near-term damage. “The output loss would increase to two percent in the long run,” it says. Two up, or two down – for a net swing of four per cent of GDP. That’s hardly inconsequential.
And as the IMF report says, what’s good for Alberta could also be good for Ontario. “Increasing the multipliers, we can simulate the potential impact of higher oil production if these linkages were to increase (i.e., if the energy sector in western provinces were to use more goods and services from industries in eastern provinces, and/or industries/refineries in eastern provinces were to use more western Canadian oil). For example, in a scenario where the linkages between Alberta’s energy and Ontario’s manufacturing sectors strengthen to match the magnitude of inter-industry linkages within Alberta, a positive shock to oil production in Alberta would have a positive impact on Ontario’s GDP which is three times larger than estimated based on the 2009 data.”
That’s of course in addition to the fiscal transfers that Alberta has made to Ontario (and Quebec) over the last decade. Quoting the Bank of Canada, the IMF report notes that “fiscal transfers, including equalization payments have been an important channel of the geographical spillovers from the energy sector, growing more rapidly for the eastern provinces since mid-2000s.”
This is not to suggest that what’s good for Alberta’s energy sector is automatically good for Canada. But arguing that the two are somehow at odds with each other, as Tencer’s piece seems to imply, is wrong. Indeed, if there’s one conclusion that emerges – or should emerge – from the IMF report, it’s that Ontario (and the rest of the country) ought to be trying to pull closer to Alberta’s energy sector rather than actively rooting against it.