While Alberta Premier Alison Redford frets about the “bitumen bubble” that is robbing her province of badly needed revenue, economists on the left have another concern: the “bitumen cliff” which, they insist, the Canadian economy is headed toward.
The economists are treading on politically fraught ground. Former Ontario premier Dalton McGuinty beat a hasty retreat last year after questioning the national benefits of oil sands expansion, while New Democratic Party Leader Tom Mulcair has been sounding oil-sands-friendlier, albeit with caveats, after warning about the dangers of oil-fuelled “Dutch disease” when he took the helm of the opposition party.
In a report to be released Thursday by the Canadian Centre for Policy Alternatives and the Polaris Institute, the four economists, including Canadian Auto Workers stalwart Jim Stanford, echo one of the country’s great economic historians, Harold Innis, to warn against Canada becoming overly dependent on the extraction and export of raw resources – in this case, oil sands bitumen.
“As staples are exported in raw form to more industrialized trading partners, Canada is left to buy back processed, value-added products and services at a much higher cost,” the economists write. “The combined outcome is a self-reinforcing staples trap [a phrase borrowed from Prof. Innis], whereby the faster Canada exports its latest staple, the less diversified and capable the economy becomes and hence all the more dependent on finding more staples to export.”
On top of that, the current staple, bitumen, causes environmental problems because it is among the most carbon-intensive sources of energy and thus contributes to climate change, the report argues. As a result, Canada is becoming increasingly dependent on an unsustainable source of wealth, with the potential for consumer backlash readily apparent in the protests against the proposed Keystone XL pipeline that would carry oil sands crude to the U.S. Gulf Coast.
“Canada’s current bitumen strategy is not only damaging to the environment, but is leaving our economy highly vulnerable to shrinking markets for bitumen as the world moves to less polluting fuels,” Tony Clarke, director at the Polaris Institute and co-author of the report, said in a release.
The left-wing economists seek to rebut a long stream of studies from business economists who dismiss the so-called Dutch disease (the notion that a commodities boom leads to a manufacturing decline) and who argue that Canada needs to accelerate the construction of pipelines to allow more bitumen to flow to export markets in the United States and Asia. The lack of market access has driven down the value of Canadian crude oil which is, by far, the country’s most valuable export.
Bank economists have warned that the Canadian crude discount will drive down business investment in the country, and result in lower government revenues and hence, reduced public spending. Ms. Redford’s Alberta is clearly being hit the hardest, and her government reported this week that its expected $900-million budget deficit has become a $4-billion shortfall.
The federal government is aggressively promoting a resource development strategy, arguing that Canada has in abundance what the world will need for decades to come, and that the oil sands represent a major asset for the country.
Despite arguments to the contrary offered by other studies, the economists insist the boom in oil sands production has played a major role in the run-up of the Canadian dollar between 2003 and now, when it is close to parity with the U.S. greenback. And that has eroded the competitiveness not only of the manufacturing sector, but of key industries such as tourism and retail.