Respected economist echoes McGuinty: "petro dollar damaging to Canada's manufacturing industry"
Economist Robyn Allan addresses recent remarks from Ontario Premier Dalton McGuinty and Alberta Premier Alison Redford, highlighting conflicting viewpoints on oil and the Canadian economy.
Respected economist Robyn Allan, former CEO of the Insurance Corporation of B.C., says the country’s move towards an oil-based economy will have severe effects on other sectors like manufacturing—a point Ontario Premier Dalton McGuinty recently reiterated during a public clash with Alberta’s Alison Redford.
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“If all this rapid expansion of oil sands leads to a higher Canadian dollar, nobody in Canada ultimately can win,” Allan said, adding her support for Premier McGuinty’s concerns.
When Redford called on Ontario and Quebec to stand up for the oil sands, McGuinty responded with a resounding “no”. Instead, he suggested that the high Canadian dollar—the “petro dollar” being driven up by demand for Western oil and gas—is hurting Ontario’s economy by making manufacturing exports less competitive internationally.
A high dollar driven by global oil demand
"The only reason the dollar is high (is because) it's a petro dollar, driven by the global demand for oil and gas to be sourced in Western Canada," McGuinty told the press on Monday.
“That has knocked the wind out of Ontario exporters and manufacturing in particular. So if I had my preferences as to whether we had a rapidly growing oil and gas sector in the West or a lower dollar, I’ll tell you where I stand: with the lower dollar.”
The Premier later apologized for the harshness of his words, assuring reporters on Wednesday that Ontario is “proud of the work that’s being done by Canadians in every part of Canada”. But his initial response sheds light on an important difference in opinion.
Are the oil sands good for Canada’s economy, or not?
“I think definitely in part we are suffering from the situation where the export of our natural resources, particularly crude oil, leads to upward pressure on the Canadian dollar. And as a result, that makes other sectors of the economy less competitive in terms of the exports,” said Allan, echoing McGuinty’s sentiments.
“He’s absolutely right to be concerned, and all Canadians should be concerned, and even the oil industry should be concerned,” she said.
Alberta oil a benefit to all of Canada: Harper
Others, however, disagree with this assessment. Prime Minister Stephen Harper has been busy spreading the word about Alberta’s oil industry and its vast economic benefits, not just for Albertans but for people across Canada. And in Redford’s words, “When we talk about oil sands, it’s not about what’s in Alberta’s best interests, it is about what’s in Canada’s best interests.”
The Alberta Premier has cited a report from the Canadian Energy Research Institute (CERI), which says Ontario is actually profiting more from the oil sands than other provinces outside of Alberta. The report explains the “trickle-down” benefit to Eastern manufacturers as oil sands producers require materials and commodities like steel.
CERI predicts that Ontario will reap about $63-billion in spin-off benefits, in addition to the 65,520 oil-sands-related jobs that are expected between 2010 and 2035. But according to Allan, the group’s analysis does not account for harm caused by the rising dollar.
“The study [Redford]’s been citing only looks at the benefits that the oil sands are receiving, and not the costs to the rest of Canada,” Allan told the Observer.
“That report is based on another CERI study that actually identifies a very strong correlation between oil prices and the Canadian dollar. So it actually says exactly what Premier McGuinty’s saying.”
Acknowledging the potential for inflation, the CERI report calls on the federal government to ensure the dollar stays low enough to prevent excessive economic damage.
“While it is highly probable that the Canadian dollar will trade above par with the U.S. dollar, it is assumed that the Bank of Canada would intervene, to put downward pressure on the relative value of the Canadian dollar,” the study reads.
Canada’s “Dutch Disease”
McGuinty is not the first to warn about the potential negative economic impacts of rapid oil sands development. Last year, the Montreal-based Macro Research Board predicted a detrimental shift they called the “petrolization” of Canada. Another research institute in Montreal warned that “resource booms don’t last forever” and suggested that Canada take steps to maintain a competitive manufacturing industry.
Recent reports have also been tossing around the term “Dutch Disease”, referring to Ottawa’s focus on developing an oil-centric economy. The term came from a crisis in the Netherlands in 1960s, when the Dutch found massive natural gas deposits in the North Sea. Rapid exploitation led to a significant rise in value for the Dutch guilder, and all non-resource industries suffered when their products became less competitive.
Even Green Party leader Elizabeth May has been blogging about Canada’s “Dutch Disease”.
“Some economists estimate that for every job created in the Athabasca oil sands, another job was lost somewhere else in Canada,” May wrote in a recent post.
In addition to arguments about jobs and the dollar, experts are also concerned about the country’s energy security. With most of Eastern Canada currently importing resources from the very countries oilsands proponents condemn as “unethical”, Allan says it’s not logical for the government to be pushing so hard for energy exports.
“Unfortunately our national leaders are busy securing supply for China when they should be looking at supply for Canada,” she said.
She explained that right now, Eastern Canada pays more for oil than Western Canada is getting for what it sells to the United States. Apart from the direct impacts on industry, this system also translates into higher prices for consumers at the pump.
“It doesn’t make sense,” said Allan.
“It looks like there’s an opportunity here for the Western Canadian oil producers to receive higher prices, and a possibility Canadian consumers could pay lower prices. So everybody becomes better off.”
Impacts of Northern Gateway
Allan’s views on the oil economy have received quite a bit of attention lately, after she submitted a thorough economic assessment to the Joint Review Panel for the review of Enbridge’s Northern Gateway pipeline. Submitted at the end of January, her report outlines some of the micro- and macroeconomic consequences of the proposed project.
According to Allan’s written evidence, “the Northern Gateway pipeline project has been presented as a production, or wealth-generating growth impact, when Northern Gateway really represents an inflationary oil price shock to the Canadian economy.”
Her assessment is based on the same logic as McGuinty’s general concerns over the oil sands—higher oil prices and a higher dollar mean a less competitive manufacturing and export sector.
“When the price of oil goes up in Canada, we actually have a negative impact on Gross Domestic Product, and we have layoffs—net,” Allan said.
“That’s why when I say there’s no benefit from Northern Gateway, it’s because higher oil prices have such a negative impact on the Canadian economy.”
On the other hand, pipeline proponents (who describe Northern Gateway as a form of “nation building”) cite key studies aiming to prove the public interest and economic benefit of the project. One report conducted for Enbridge by Wright Mansell Research promises up to $270 billion in gains for the Canadian GDP, as well as $48 billion in labour income and $81 billion in government revenues.
However, the report relies on certain assumptions about yearly inflation and increases in the price of oil—assumptions Allan says misrepresent the reality.
“When I read through the documents, I was surprised to find such a significant degree of misrepresentation,” said Allan.
“Everybody assumed that if they were saying it, it must be right. But no, that’s not the case.”