ROME — The two greatest economic forces unleashed on Canada in recent decades were the Canada-U.S. free-trade agreement and the oil-sands development in northern Alberta. The first flung Canada into the bear pit of the North American economy. The second made Canada an energy power and Alberta the world's biggest boomtown. Both, for better or worse, have utterly transformed the way the country competes, invests, works and, arguably, is governed.
But what most distinguishes the two is the opposing ways in which they came about.
As an issue, the free-trade debate consumed Canada, and became incredibly acrimonious during the 1988 election campaign – nations have gone to war with less fuss.
A decade or so later, it was clear that the oil sands were on the verge of the biggest capital-spending bonanza ever seen in Canada (the bill so far: $90-billion) as companies tried to turn a gooey deposit the size of Florida into an oil juggernaut.
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This time, there was almost no debate about how – and how quickly – the development should proceed. It was not planned within the context of a national energy plan because one did not exist. And there was almost no debate about the moral, environmental and business implications of using a clean fuel (natural gas) to make a dirty fuel (synthetic oil) to keep American SUVs on the road.
There was no carbon-dioxide-reduction plan for the oil sands even though Canada was on the verge of signing the Kyoto accord. There was little debate on the wisdom of unleashing a breakneck expansion, one that would create development overload in northern Alberta and effectively reverse decades of attempts to diversify both the Alberta and Canadian economies.
CANADA AN OPEC NATION?
Thanks to the oil sands, Canada is the top oil supplier to the United States – and increasingly viewed from afar as Saudi Arabia with snow and its currency a petrodollar. The Organization of Petroleum Producing Countries would love Canada as a member.
The lack of planning was evidently the plan, so to speak, of former premier Ralph Klein and Murray Smith, the energy minister later installed in Washington as the province's cheerleader. That they got away with the no-vision thing should come as no surprise. No one was watching the dynamic duo and shouting: “Slow down, boys!” The deed is done. The developments now under way can't be put into cold storage.
There is certainly a lot to like about the oil sands – the high-paying jobs, the technological successes, the pride in having created a new industry, the stock-market gains made by the companies clawing away in the muck like super-sized armadillos. But Canada gave up a lot by not having that debate. Had it taken place, it's very likely that Canada would be a very different, and perhaps better, place today.
Becoming a one-trick pony, for example, is a huge risk. Of course, Canada is far from having an oil-only, or commodities-only, economy; the value of auto exports to the United States still exceeds the value of oil exports. But there is no doubt the diversification trend that created companies such as Bombardier Inc., Research in Motion Ltd., Nortel Networks Corp., Magna International Inc., some of the continent's biggest financial players (Royal Bank and Manulife Financial among them) and a car-production capability that exceeded Michigan's has gone into reverse, in good part because of the massive amounts of capital and manpower going into the oil sands.
This is what economists call the “crowding out” effect. Note that Suncor Energy Inc. this week announced that it would double its oil-sands spending to $20.6-billion. When was the last time you saw an investment like that outside the oil industry?
The break point came in 2004, when, for the first time in more than a decade, commodities, including oil, accounted for more than half of Canada's overall merchandise exports. Since then, the figure has climbed to about 60 per cent. Energy exports to the United States have more than doubled since 1999 and stand to double again as prices and volumes soar.
Oddly, the C-buck is acting as a petrodollar even though energy still represents a minority of the overall economy. It bottomed out in 2003, at 61 cents (U.S.) and is now at par. Its climb has closely matched the rise in the prices of commodities, notably oil. Canadians may not consider their loonie a petrodollar, but currency traders do.
So what's wrong with a country that is going back to its commodities roots? Lots, even though the fat profits create the impression that Canada is on a roll. Commodity prices are inherently unstable. Oil prices are more than $90 a barrel today and could go to $120 if China and India turn into oil addicts. (The New Yorker says India and China together could gobble up 100 million barrels a day, compared with the current global tally of 86 million, if their per-capita consumption were just half of U.S. levels.)
But a global recession, higher energy taxes or the discovery of big conventional oil fields could send prices plummeting. A decade ago, oil plunged to $11 (U.S.) a barrel and Canada gave thanks for the fact that its industrial activities went well beyond pumping oil out of the ground.
The truth is that commodities have declined in price in real (inflation-adjusted) terms since the War of 1812. There have been upward spikes – the current bull market started five years ago – but the higher prices have never lasted. As Canada acquires more of a resource-based economy, it also gains greater exposure to the boom-and-bust cycles that are the hallmark of the oil, rock and tree industries. The ebbing and flowing of global commodity markets increasingly will dictate the direction of the economy, hurting the country's ability to influence everything from employment growth to interest rates.
The oil sands also appear to have warped the very nature of employment in Canada. Yes, fans of the oil sands point to the employment growth in Alberta, where anyone with a heartbeat can make $100,000 a year. Alberta's gross domestic product per capita became the highest in the land in 2006, at almost 160 per cent of the national average. (Ontario – ouch! — was below the national average, making it a “have-not” province for the first time.)
MORE JOBS LOST
But Alberta's employment gains have been more than offset by losses elsewhere. About 350,000 manufacturing jobs, most of them in the East, have vanished since 2002. Only one in five of the lost jobs has resurfaced in the resources industry.
Of course, you could argue that the jobs would have disappeared anyway because of everything from the flying loonie to the woes of U.S. automakers, whose Ontario factories are turning into echo chambers. But the high dollar's clobbering of exports is at least partly the result of its petrodollar status, in turn the result of the oil-sands monster.
Interest rates are probably higher than they would otherwise be because of the oil spending spree's inflationary effect. With exports of manufactured goods on the wane because of the high dollar, job growth in Canada has come in non-manufacturing industries such as retailing and health care. Such jobs do not pay well. Labour income as a percentage of GDP is plummeting.
The economic non-debate was, sadly, matched by the environmental non-debate. The figures are astonishing. Oil-sand production is two to three times more carbon-intensive than conventional crude production. Parts of northern Alberta are turning into moonscapes as forests and wetlands are removed to gain access to the bitumen. It takes two to four barrels of water and 750 cubic feet of natural gas to make one barrel of synthetic oil.
The oil companies want to build a pipeline up the Mackenzie River Delta to bring natural gas to their Alberta projects. More gas for the oil sands means less gas for heating homes and generating electricity. Once domestic gas reserves run dry – many Western gas wells are depleting at 25 per cent a year – Canadians will have little option but to buy imported liquefied natural gas, with its costly plants and environmental risks. The option is to convert your furnace to coal.
Alberta may want to consider the oil sands its show, so hands off. But every dollar spent, every drop of water consumed, every tonne of carbon dioxide produced has implications for the rest of Canada and the world. It's not too late to draft an energy and environmental strategy that benefits most Canadians. Free-trade warranted such a debate; why not the oil sands? The developments may have to slow down while answers are sought, but it's not as though the oil will rot in the ground.
Eric Reguly is an award-winning Globe and Mail columnist based in Rome.
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