Brian Lee Crowley and Robert P. Murphy – Macdonald-Laurier Institute
A number of leading Canadians, including Ontario Premier Dalton McGuinty and the Leader of the Official Opposition, Thomas Mulcair, have warned that natural resource extraction in Western Canada is hurting Ontario’s manufacturing sector. This criticism is based on the rise of the dollar, caused in part by foreign demand for our oil in particular. What it overlooks, however, is the direct benefits oil and gas industries shower across all provinces, including Ontario and its manufacturing sector.
The complaint against Canada’s oil and gas activities is based on what economists call the “Dutch Disease,” in reference to a situation that plagued the Netherlands in the 1970s. The allegation is that soaring global commodity prices leads to a large demand for Canadian exports of oil and natural gas. When foreigners buy Canadian resources, it drives up the value of the Canadian dollar. Other things equal, a strong Canadian dollar makes other Canadian exports more expensive for foreigners, causing Canadian manufacturers to see depressed demand for their own wares. Essentially, the “Dutch Disease” argument claims Canadian exports of oil and natural gas are crowding out the ability of Ontario manufacturers to sell products to foreigners.
The connections between high commodity prices, a strong dollar, and dampened demand for exports are valid, as far as they go. But are the critics saying Canadians would be better off if worldwide demand for oil were lower? What if the world price for crude remained where it is, but all of Alberta’s oil sands deposits were magically transported to Montana — would that make Canadian manufacturers richer, let alone Canadians in general?
Beyond these thorny questions, the critics don’t acknowledge the “export market” for Ontario manufacturers provided by the western oil and gas industries themselves. In other words, even if we grant for the sake of argument that booming petroleum exports make it harder for Ontario manufacturers to ship goods abroad, it doesn’t follow that these manufacturers will see a net reduction in their business. This is because booming petroleum exports allow the domestic oil and gas industries to increase their own purchases, thereby providing markets and employment to businesses in Ontario and other provinces.
Several studies have estimated these impacts. One of the most comprehensive is a 2009 paper from the Canadian Energy Research Institute (CERI). It projected that from 2008-2033, the Canadian petroleum industry would increase total economic output by $149 billion in Ontario alone, and another $49 billion in Quebec. Furthermore, the CERI model estimated petroleum activity would generate the equivalent of 88,000 fulltime jobs just in Ontario, and another 32,480 full-time jobs in Quebec, lasting the entire 25-year period.
In addition to the direct economic effects flowing from purchases made by oil and gas companies, petroleum activities in the western provinces also provide a large flow of tax receipts to the federal government. This indirectly benefits Canadians in other provinces, because they in turn will shoulder a lower tax burden to finance a given amount of federal spending. The same 2009 CERI study estimated that between 2008 and 2033, the petroleum industry would generate some $409 billion in federal revenue. Even if we include the royalty payments earned by the western provinces, the federal government reaps 36 per cent of all government revenues attributable to petroleum development.
In times of economic crisis, tempers flare and workers in depressed regions look with suspicion upon those who are relatively prosperous. In addition, international trade flows and the foreign exchange markets are very complex areas that confuse even professional economists.
For these reasons, the Canadian public should be careful when interpreting the allegations of oil and gas activities hurting Ontario manufacturing. Canada’s vigorous and prosperous natural resource sector creates new demand for goods and services produced elsewhere in the country. High natural resource prices create a direct market for our manufactured goods, while boosting output, job growth, and tax revenues across all provinces.
Brian Lee Crowley, managing director of the Macdonald-Laurier Institute (MLI) and economist Robert P. Murphy are the co-authors of “No Dutch Treat: Oil and Gas Wealth Benefits All of Canada,” the first essay in a series published by MLI on natural resources, manufacturing and the dollar: www.macdonaldlaurier.ca