This article originally appeared in the Financial Post.
By Philip Cross and Jack Mintz, May 2, 2024
Let us now praise Canada’s resource sector. It’s long past time somebody did.
Natural resources generate 14.9 per cent of Canada’s GDP, with energy alone accounting for half that. They also account for over 45 per cent of our country’s manufacturing output. Nearly one in 10 Canadian jobs is related to resources, more than that for those of us living outside our major cities.
Natural resources have a heightened importance in investment and exports and the sector’s productivity is by far the highest of any industry’s. Canada’s comparative advantage in trade is heavily slanted to resources, which generate 58 per cent of all merchandise export earnings. Natural resources are the only sector in which Canada has a trade surplus. By themselves, resource exports exceed Canada’s total merchandise imports. Nearly half of Canadian business investment is in natural resources — despite effective tax rates on new oil and gas investment that are twice as high as for other industries and delays in regulatory approval that typically add another fifth to the cost of investment.
The dominant role resources play in investment and exports reflects their importance to Canada’s competitiveness in international markets. Even before the pandemic, the Bank of Canada stressed the need to shift growth from household and government spending, which were being fuelled mainly by debt, to investment and exports. The shift didn’t occur, however, largely because firms were reluctant to commit to the investments needed to improve our export competitiveness and capacity. With interest rates rising to more normal levels after the run-up in debt during the pandemic, the need for investment and exports to contribute more to long-term growth has only increased.
Despite natural resources’ economic importance, Canadians have often downplayed, ignored or denied the sector’s contribution. Justin Trudeau, speaking to the World Economic Forum at Davos in 2016, articulated traditional Canadian discomfort with our resource riches: “My predecessor wanted you to know Canada for its resources. I want you to know Canadians for our resourcefulness.”
Not everyone in Canadian public life has been resource-averse, however. The late Jim Prentice, former Alberta premier, wrote in Triple Crown: Winning Canada’s Energy Future that “I have always been taken aback by the diffidence — even embarrassment — that many Canadians seem to feel about Canada’s natural resource wealth.” Derek Burney, chief of staff to Brian Mulroney, observed In Braver Canada that “What once was a major competitive strength for Canada — the abundance of its natural resource base — is now shunned or stunted by ambivalent regulatory and court rulings.”
Critics have long disparaged the resource sector, referring to such syndromes as a “staples trap,” the “resource curse” and the “Dutch disease.” Compounding this negativity is that most natural resource industries are located outside core urban areas, making them nearly invisible to media, cultural and academic elites. Natural resources are also shackled with the reputation of being low-tech and requiring little effort or ambition beyond luck in the “geographic lottery” that is a resource endowment. Finally, the country’s abundant resources are believed to overtly inhibit the development of knowledge industries in Canada. “I’m a lumberjack and I’m OK,” as Monty Python used to sing — but more than a little dim.
None of these prejudices is based in fact. Canada’s natural resource development has been driven by a steady stream of inventions and innovations. Canadians have often pushed themselves to the technological frontier with new technologies in wheat, canola, hydroelectricity, metals and the oil sands. Because the sector’s often cyclical nature requires a flexible labour force and tolerance of creative destruction, it nourishes the cultural values that support entrepreneurship and innovation in all industries. Its capital-intensity necessitates high savings and long-term planning. And its dependence on foreign markets encourages receptivity to and talent for international trade and investment.
The fundamental importance of natural resources, but especially energy, means that to avoid economic disruption the transition to new energy sources needs to be well-managed and based on economic realities. Governments have encouraged the transition by using taxes and regulations to raise the cost of fossil fuels while subsidizing renewable energy. But both the new forms of energy and the transition to them are costly, and resistance is growing in an electorate already struggling with inflation and interest rates. If the transition to new energy sources continues to be mismanaged, Canadians’ real incomes will fall even more sharply than they did over the past decade.
Distinguished Fellow Jack Mintz and Senior Fellow Philip Cross are co-authors of the Macdonald-Laurier Institute’s new study, “Canada’s resource sector: Protecting the golden goose.”
