Bank of Canada Governor Mark Carney is very capable and impressive, but Britain has no lack of financial experts meeting that description. What differentiates him – and what drove the British government’s determination to recruit him as the next head of the Bank of England – is that he presided over the central bank of the economy that weathered the financial crisis better than other developed countries.
The most often cited reasons for Canada’s performance include sound home mortgage practices and prudent federal fiscal management. While those factors were crucial in the early days of the financial crisis, they don’t explain the country’s continuing strong performance even as our closest neighbour and dominant trading partner suffers through protracted economic doldrums.
So what is it that has made Canada and, by association Mr. Carney, such a star performer? The pivotal factor is that Canada is one of the world’s largest resource exporters.
Natural Resources Canada estimates that in 2010, the energy, mining and forestry sectors generated new capital investment of $95-billion and total exports of $200-billion. The degree to which natural resources underpin Canada’s economic prosperity is illustrated by balance of trade data showing an $84-billion net balance resource trade surplus, while manufacturing incurred a trade deficit of more than $60-billion.
The biggest contributor to Canada’s balance of trade is, by a wide margin, oil and gas. The industry is a major job creator, employing more than 550,000 people. It is also the largest investor in the economy, with $55-billion for new capital projects in 2012. Many of those dollars went to manufacturers and contractors from coast to coast. In 2011, the industry paid $21-billion into the coffers of the federal and provincial governments.
Now that Ontario has become a “have-not” province, the four oil- and gas-producing provinces (B.C., Alberta, Saskatchewan, and Newfoundland and Labrador) are the only contributors to equalization. What if those provinces were no longer able to pay into equalization? The Quebec deficit for the fiscal year ending March 31 is projected to be $2.3-billion. Without its $7.4-billion equalization grant, that deficit would balloon to a $9.7-billion. Manitoba’s projected $570-million deficit would quadruple to $2.3-billion. New Brunswick’s forecast of a $410-million deficit would jump to more than $1.9-billion, Nova Scotia’s estimated $250-million deficit would top $1.5-billion, and P.E.I.’s projected deficit would go from $75-million to $400-million.
It’s clear that the vitality of the oil and gas industry is crucial to Canada’s economic and social fabric. But that vitality is under serious threat from a growing oil price discount due to lack of export pipeline capacity. Until recently, industry leaders viewed this as a short-term problem. That was before Canadian crude fell $42 per barrel below U.S. Gulf Coast prices in December, slashing production revenues and rendering new investments uneconomic. Nearly all oil sands producers are reassessing big projects and reducing their investment plans.
TransCanada Corp.’s Keystone XL pipeline to southern U.S. refineries remains tied up in a highly political tug-of-war between American supporters and anti-oil sands activists, making it even more clear that Canada must diversify its oil exports to world-priced Asian markets.
Meanwhile, Enbridge Inc.’s proposed Northern Gateway pipeline, which would send oil to Asia via B.C.’s West Coast, is caught in a domestic battle featuring those same anti-oil sands groups stoking public fears of oil spills. In reality, the risks of a spill are extremely low. Just look at Newfoundland’s oil industry, which has an excellent operating record in the vastly more hostile North Atlantic environment.
Every day, more than 100,000 kilometres of pipelines carry more than three million barrels of oil throughout Canada. How could a country let its most important economic resource languish by failing to build one more pipeline?
One thing is certain – failure to solve this problem means the next Bank of Canada governor will preside over a substantially less robust economy than his predecessor.