In a June 15th op-ed for the National Post, MLI’s Brian Lee Crowley and Robert Murphy write that all parts of Canada enjoy benefits from oil- and gas-rich western provinces that far outweigh any ill effects from a higher Canadian dollar. The full column below and it was republished in the Vancouver Sun.
The op-ed is part of a larger MLI study released on May 30th entitled, No Dutch Treat: Oil and Gas Wealth Benefits All of Canada. It is the first in the High Dollar Series of Commentaries on the benefits of the Canadian petroleum industry. The media release for this study can be found here.
Much ado about the ‘Dutch disease’
By Brian Lee Crowley and Robert Murphy, National Post, June 15, 2012
A number of leading Canadians, including Ontario premier Dalton McGuinty and the leader of the Official Opposition, Thomas Mulcair, have warned that natural resource extraction in Western Canada is hurting Ontario’s manufacturing sector. The complaint is based on what economists call the “Dutch Disease,” in reference to a situation that plagued the Netherlands in the 1970s. The theory is that when foreigners buy Canadian resources, they drive up the value of the Canadian dollar. Other things equal, a strong Canadian dollar makes other Canadian exports more expensive for foreigners, causing Canadian manufacturers, including those from Ontario, to suffer depressed demand levels for their wares.
The connection between high commodity prices, a strong dollar, and dampened demand for exports is valid. But are the critics saying that Canadians would be better off if worldwide demand for oil were lower?
Beyond this thorny question, the critics don’t acknowledge the domestic “export market” for Ontario manufacturers that is provided by the Western oil and gas industries themselves. Even if we grant that booming petroleum exports make it harder for Ontario manufacturers to ship goods abroad, it doesn’t follow that these manufacturers will see a net reduction in their business. This is because booming petroleum exports allow domestic oil and gas players to increase their own purchases, thereby providing markets and employment to businesses in Ontario and other provinces.
Several studies have estimated these impacts. One of the most comprehensive is a 2009 paper from the Canadian Energy Research Institute (CERI). It projected that from 2008-2033, the Canadian petroleum industry would increase total economic output by $149-billion in Ontario alone, and another $49-billion in Quebec. Furthermore, the CERI model estimated that petroleum activity would generate the equivalent of 88,000 full-time jobs just in Ontario, and another 32,480 full-time jobs in Quebec for the 25-year period in question.
In addition to the direct economic effects flowing from purchases made by oil and gas companies, petroleum activities in the Western provinces also provide a large flow of tax receipts to the federal government. This indirectly benefits Canadians in other provinces, because they in turn will shoulder a lower tax burden to finance a given amount of federal spending. The 2009 CERI study cited above estimated that between 2008 and 2033, the petroleum industry would generate some $409-billion in federal revenue. Even if we account for the royalty payments earned by the Western provinces, the federal government still reaps 36% of all government revenues attributable to petroleum development.
In times of economic crisis, tempers flare and workers in depressed regions look with suspicion upon those that are relatively prosperous. International trade flows and the foreign exchange markets add another layer of complexity. For these reasons, the Canadian public should be careful in the face of allegations that oil and gas activities hurt Ontario manufacturing.
Canada’s vigorous and prosperous natural-resource sector creates new demand for goods and services produced elsewhere in the country. High natural resource prices create a direct market for our manufactured goods, while boosting output, job growth, and tax revenues across all provinces.
If all that amounts to a “disease,” Dutch or otherwise, spare us the cure.
Brian Lee Crowley, managing director of the Macdonald-Laurier Institute (MLI) and economist Robert P. Murphy are the co-authors of “No Dutch Treat: Oil and Gas Wealth Benefits All of Canada,” the first essay in a series published by MLI on natural resources, manufacturing and the dollar: macdonaldlaurier.ca.