When the price of oil is the foundation of your country’s economy, a sudden plunge to half its value focuses the mind wonderfully, doesn’t it?
Phrases such as “resource curse” suddenly sound a lot less like airy academic vagaries. Boasts such as “energy superpower” sound less confident and more tragic. And it becomes harder to dismiss as fictions or insults terms such as “staples trap” or “Dutch disease” or “bitumen cliff.”
Those all refer to a well-known phenomenon: When an economy is built on the extraction of raw materials, the incoming flood of easy money makes it very difficult for a country to thrive in non-resource fields. During a resource boom, your pumped-up currency and labour costs hurt other export industries and many service sectors. Your competitiveness plunges. You lose interest in innovation, research and development, because you make more money taking things out of the ground. Despite the wealth flood, you run up public and private debt, because rates are low and the boom seems perpetual. You become dependent on imports of both goods and debt, which are cheaper when your currency is strong.
Then the boom comes down on you. At the moment, most petroleum-based countries are feeling it. Russia is devastated: After spending its reserve savings trying to save the ruble, it’s now facing ruin. Hyperinflation has kicked in. Food prices rose by as much as 30 per cent. Mortgages, which most Russians put in more stable foreign currencies, have become unsustainable.
Venezuela, which used oil revenues to prop up an artificial economy by subsidizing food and fuel, is faring even worse. (Indeed, reports suggest that Cuba’s rapprochement with the United States this week happened, in part, because Havana feared the total demise of its partner state.)
But what about Canada? We’ve been hurt – the dollar’s plunge and Alberta’s looming fiscal crisis are just a start. But we’re not Russia or Venezuela. They can fairly be called rentier states: That is, everything their governments do depends on payments for petroleum. Canada is more than a pool of oil and a flagpole, isn’t it?
Yes and no. Canada has many other industries, although a good number of them are also resource-based – and during the 2000s, there was a “commodity convergence” so the prices of everything from oil and gas to food grains often rise and fall together.
In 2000, raw resources accounted for 40 per cent of Canada’s merchandise export activity. By 2011, it had risen to almost two-thirds. Was Canada’s resource boom actually destroying the viability of other industries?
During peak boom years, it was unacceptable even to ask. When the Opposition leader noted in the House of Commons, in 2012, that a Canadian government-funded study had shown that Canada was falling prey to “Dutch disease” (named after the 1960s natural-gas boom, which devastated other exports in the Netherlands), Conservative MP Kellie Leitch offered the government’s response: “The leader of the Opposition wants to call Canadian employers a disease.”
Even some far better informed Canadians made light of the problem. One popular counterargument was best expressed by Mark Carney, then Bank of Canada governor, in a 2012 speech in which he acknowledged that some “Dutch disease” factors were present, but said we shouldn’t worry because it was good money and, besides, oil prices were going to remain high for a very, very long time.
“The bank’s view is that a large, sustained increase in demand is the primary driver of elevated [oil] prices,” Mr. Carney said. “The breadth and durability of the commodity rally underscore this conclusion.” He pointed out that “rapid urbanization” of the developing world would keep demand high throughout the foreseeable future.
He, and much of Ottawa and Moscow and Caracas, failed to consider the possibility that it would not be lack of demand but rather abundance of supply (led by huge new U.S. reserves) that would kill the boom.
There were two ways to avoid a resource trap: By investing heavily in “smart” industries (which Canada did a bit of) and by keeping the oil revenues out of your own economy like Norway (which puts more than 90 per cent of its petroleum earnings into non-Norwegian investments, to keep the money beyond its borders). Canada did the opposite: We spent, even more than we earned. Much like those other energy superpowers, we somehow used a money flood to build up large levels of both public and private debt, much of it denominated in foreign currencies that are becoming more expensive by the day.
Resource curse indeed. It might be time to start taking those insults seriously.
Editor's Note: This column earlier referred to "economic activity" when the figure referred to export activity. It has been changed.Report Typo/Error