Canada is an energy superpower unlike any other.
Eight countries own 78 per cent of the world's proven oil reserves: Saudi Arabia, Canada, Iran, Iraq, Kuwait, United Arab Emirates, Venezuela and Russia. Only one member of that club can claim to be a stable, developed democracy.
But another thing separates Canada from most of the world's largest energy producers, even the democratic ones: Our oil-driven economic clout is so new that we're still arguing over how to handle it.
Norwegians don't fuss much over oil money. With a $370-billion oil fund, they have plenty to go around among 4.7 million people (and no provinces to grab a share). In Mexico, there is no room for debate: The Constitution grants the central government an iron grip on energy development, which is exercised through state-owned Petroleos Mexicanos (Pemex), and oil profits represent about one-third of government revenues.
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But in Canada, there's little sense of shared wealth.
“You look at the other nations that are oil-producing, the whole country is considered to be an oil producer,” says University of Calgary economist Frank Atkins. “But we don't think of Canada as an oil-producing country. We think of Alberta as an oil-producing province.”
For some, the West's blessing feels like the East's economic curse. And there is no more visible cause of the divide than the incredible, crude-fuelled surge of the Canadian dollar.
the loonie factor
Canada didn't always have a petrodollar. In the late 1970s, as oil prices surged to record highs, the C-buck didn't go up; it fell. In 1990, when Iraqi dictator Saddam Hussein sent tanks into Kuwait and crude prices jumped again, the dollar did not move much. What's different this time?
A couple of factors might explain the loonie's new link to oil. In the late 1970s, oil got expensive because of geopolitical strife – the revolution in Iran, among other events – which caused a rush of capital into the safety of the U.S. dollar, driving our currency down. This time, oil is expensive because supplies are tight, and the U.S., with its banking woes and its large fiscal deficit, is no currency safe haven.
Also, output from oil sands is rising faster than our own consumption, leaving more oil available to sell to other countries. Crude exports equalled more than $30-billion in 2005, up from $8.3-billion a decade earlier. Export Development Canada figures that every $10 (U.S.) increase in the cost of a barrel of oil now drives the Canadian dollar up by 3 cents, all else being equal.
The dollar-oil relationship will only get stronger if Canada's oil exports triple again, because of high prices and new projects in Athabasca. But does an end to cheap oil mean an end to a cheap currency, too? In other words, is a high dollar permanent? “You can get ‘stickiness' in the exchange rate,” says EDC chief economist Stephen Poloz. That doesn't mean parity is here to stay, but it could be a long time before we see an 85-cent dollar again.
And if that's the case, it will force massive change to the Canadian economy. For many manufacturing companies, the impact (a strong currency) is far more serious than the cause (high energy prices). Take one of the country's largest lumber producers, Canfor Corp. of Vancouver. Every $1 increase in the price of a gigajoule of natural gas cost the company about $4-million (Canadian) in 2006. But a 1-cent rise in the dollar hit the bottom line by $19-million.
We've had a high dollar before, of course, but in the free-trade era, never for a sustained period. From 1989 through 2003, the first 15 years of the Canada-U.S. free-trade agreement, the average trading price of the Canadian dollar was about 74 cents (U.S.). Last year's average was 93 cents. As for life above parity? If you think the factories of the nation are suffering now, you haven't seen anything yet.
The more ferocious assault may be on Ontario's bread and butter: cars. Though auto manufacturing is one of the few industries in which Canadian plants have a productivity edge, it isn't large enough to offset the rising dollar and falling wages of U.S. workers, now that the United Auto Workers has agreed to changes that could shave $20 to $25 an hour off the labour bills of the Detroit Three.
Toronto-Dominion Bank chief economist Don Drummond calls it “the Delphi effect,” after the U.S. auto parts maker that filed for Chapter 11 and negotiated major wage cuts out of its unions, and whose workers now earn less than half the estimated $70 in pay and benefits Canadian auto workers make. “I think that we're going to see a major attack on that industry – to the point of whether it will survive,” the TD economist says.
For sheer destruction, though, it will be hard to top the forest sector, one of the most dollar-sensitive and energy-intensive. (At least one prophecy of doom has come true: Tembec Inc., whose former CEO used to speak openly about what a wreck his firm would be with an 85-cent dollar, announced a plan that is a bankruptcy restructuring in all but name.) About 11 per cent of the manufacturing jobs Canada has lost since 2002 have been in the sawmills – 32,000 lost jobs already.
Still: Hewers of wood no more? It's a stretch. “We'll still have trees and somebody will still want the raw product,” Mr. Drummond says. But turning it into two-by-fours may become someone else's job.
The idea of exporting logs is anathema to politicians, who see it as exporting jobs. But log shipments still went up fivefold between 1996 and 2005. Most of the wood ends up in the U.S., but increasingly, processing is being done in Japan, South Korea and, yes, China.
knock-on effects
The oil boom does not represent bad economic news for everyone outside of Alberta. On the contrary: The oil boom and the petrocurrency create knock-on effects that make the whole country richer, even if that's small consolation to the newly unemployed welder at Ford or the maintenance man from AbitibiBowater.
Just how much richer is hard to pinpoint. A little more than two years ago, economists at the Canadian Energy Research Institute in Calgary calculated oil sands development would add nearly $800-billion to Canada's gross domestic product over the first two decades of this century. The majority of that – about $635-billion – would happen in Alberta. But Ontario would get a boost of roughly $100-billion, as bankers, Bay Street lawyers and steel makers cash in.
If the numbers seem huge, even when spread over 20 years, they probably understate the value of the oil sands. CERI's economists had assumed prices for synthetic crude, the kind produced by the oil sands, would be $32 a barrel. At today's prices, nearly three times as high, you can multiply the impact.
“We've always been a country which has had shifts in population and wealth over time, and I would argue that each time this has happened it has benefited Confederation,” says Glenn Feltham, dean of the University of Manitoba's Asper School of Business. “So this isn't something to be concerned or scared about. There's going to be a lot of wealth generated for Canada.”
Even if the dollar makes Canadian manufacturers bleed – well, that's the continuation of a trend, says Mr. Poloz of EDC. “When I was born, 30-odd per cent of everybody in Canada was in the manufacturing sector. Today, that's 12 or 13 per cent. Have the last 50 years been bad? Surely not. The standard of living has gone up enormously … There's always fatalities along the way.”
Perhaps the question is not one of prosperity, but inequality. Alberta's gross domestic product per person, at $71,200, is about 60 per cent higher than Ontario's. (The figures are based on Statistics Canada data from 2006 and represent nominal GDP, not adjusted for inflation.)
Alberta's economic output, per person, is nearly twice Quebec's. It's more than twice that of every Atlantic province, save for oil-rich Newfoundland and Labrador. Alberta's productivity is reflected in wage growth. Alberta workers, who traditionally earned less than the average employee in Ontario, passed them in 2006 and now earn the highest wages in the land. These numbers don't tell the whole story – it's a lot more expensive to buy a house in Calgary than in Windsor, Ont., or in Charlottetown – but the direction is clear enough.
The impact on government revenue is also lopsided. The CERI study in 2005 took a stab at it and figured that 61 per cent of the tax revenue generated from oil sands would go to Alberta (this includes not just royalties but other taxes, like personal and corporate income taxes).
That estimate is out of date now, given the changes to royalties and tax rates, but if it's close to accurate, most Albertans would argue it's only fair. It's their province absorbing the stress of the oil boom – population growth, crowded schools and overburdened hospitals, congested highways.
Ottawa's formula for equalization, though, doesn't take into account those pressures. It's based on “fiscal capacity,” or the province's ability to raise revenues. This year, Alberta, B.C. and Ontario are the only provinces not to receive money from the $12.7-billion equalization pot. But it's conceivable Alberta's fiscal might could throw the national average so far out of whack that one day it's the only one funding the program, and even Ontario is a “have-not” province.
the great divide
This picture – of a country in which a single province charges ahead while the others struggle – may be too simplistic. It assumes Ontario's car factories and New Brunswick's pulp mills can never adapt to the new environment.
But it also takes for granted that Alberta's rapid growth will continue unabated, which isn't necessarily so, even if some Albertans hold that view.
“I go back home and see some of my high-school friends who entered the construction industry in the late 1990s and they've never known a recession and are doing very well,” says David Detomasi, a native of Cochrane, Alta., who now teaches at Queen's University. “The tendency to believe this is going to go on forever is very strong.” He argues that now's the time for the province to begin thinking about an oil downturn. The province lacks Norway's enormous stash of energy money: Alberta's Heritage Savings Trust Fund has just $16-billion in it after 31 years of existence. But the provincial government is debt-free and imposes the lowest tax rates of any province because it can ride oil and gas royalties. Resource revenues represent 29 per cent of the provincial budget (in Ontario the proportion is less than 1 per cent).
“Branding Alberta as something other than an oil and gas state should be on the top of the list as something that they can do,” Mr. Detomasi says.
A more diversified economy that would help the province get through a period of lower oil revenues would not hurt, especially if Alberta's wealth becomes so disproportionate to every other region's that politicians in Ottawa, with their eyes on votes in Ontario and Quebec, try to do something to distribute that money. Think of a new national energy program in 2015, with new taxes on oil production (maybe a carbon tax?) or federally mandated, lower domestic prices for energy to help manufacturers.
“It's tough, sitting here in 2008, to think that that is possible,” says TD's Mr. Drummond. “But on the other hand, it's tough to see a country surviving in a monetary and a political union in which there's such a great and persistent divide.”
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