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June 7, 2012 - In a new op-ed published in the Vancouver Sun, MLI's Brian Lee Crowley and Robert Murphy respond to recent study released by The Pembina Institute that warns of the "economic downsides" of oil-sands development. Crowley and Murphy write, "The study overlooks offsetting fiscal benefits of the petroleum boom,  including jobs and federal revenue." The op-ed is based on 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.

 

Dutch disease not a Canadian issue

By Brian Lee Crowley and Robert Murphy, Vancouver Sun, June 7, 2012

A study recently released by The Pembina Institute warns of the "economic  downsides" of oil-sands development. The study bolsters the "Dutch disease"  charge put forth by New Democratic Party leader Thomas Mulcair and others,  claiming that the oil boom hurts the manufacturing sector. The Pembina study  also charges that the petroleum sector benefits from preferential tax  treatment.

In contrast to these claims, The Macdonald-Laurier Institute recently  released a report showing that the oil boom creates manufacturing jobs in  Ontario and other provinces, and provides large flows of tax revenue to the  federal government.

"Dutch disease" refers to the experience of the Netherlands in the 1970s. The  argument is that the worldwide commodity boom leads to strong demand for  Canadian resource exports, which drives up the Canadian dollar against other  currencies. The stronger dollar makes Canadian goods more expensive to foreign  buyers, hurting Canadian manufacturers. This is the mechanism underlying  Mulcair's warnings, and it is why the Pembina study refers to "clear winners and  losers" from what it dubs "oilsands fever."

There is academic literature laying out the theoretical possibility of  so-called Dutch disease. Yes, other things being equal, a stronger Canadian  dollar makes it harder for Canadian manufacturers to export their goods. Yet  when it comes to oilsands development, other things are not equal. The surging  demand for Canadian resource exports has spurred massive growth in the Canadian  energy sector, which in turn leads to demand for manufactured goods. In other  words, high worldwide demand for oil leads to a high domestic demand for  Canadian manufacturing.

In our study, we surveyed the literature to quantify these effects. A 2009  study from the Canadian Energy Research Institute (CERI) projected that from  2008 to 2033, the Canadian petroleum industry would increase total economic  activity by $149 billion in Ontario alone, and another $49 billion in Quebec.  Furthermore, the CERI model estimated that petroleum activity would stimulate  enough demand to create the equivalent of 88,000 full-time jobs just in Ontario,  and another 32,480 full-time jobs in Quebec, lasting the entire 25 year  period.

Beyond these broad projections, the news is full of supporting anecdotal  evidence. For example, Toronto-based Berg Chilling Systems Inc. has been  supplying equipment to Western Canada's petroleum sector, including Suncor  Energy Inc. and two chemical plants in Alberta. Martin Lavoie of the Canadian  Manufacturers and Exporters (CME) association says, "Mining, oil and gas is  driving the growth in manufacturing," and explains that CME "is a big supporter  of the big pipeline projects in the north and the major oil and gas  developments."

To get a sense of how Canadian manufacturers benefit from the strong nearby  petroleum sector, consider: From 2007 to 2011, the United States shed 2.1  million manufacturing jobs, a drop of 15.5 per cent in just four years. In  contrast, over the same period Canadian manufacturing lost 270,700 jobs, a drop  of 13.3 per cent. Of course, there are many variables affecting economic growth,  but these figures are awkward for the Dutch disease theory, since the U.S. is  the world's largest net importer of oil.

Further, North Dakota is the state with the lowest unemployment rate (at 3.0  per cent) in the United States, thanks in part to its own mineral deposits. If  the U.S. only had more energy-rich states like North Dakota, its manufacturing  woes would quite likely have been alleviated during the recession.

Beyond the allegation of creating "clear winners and losers" in Canada's  economy, the Pembina study also claims that supposedly preferential federal tax  treatment of oil and gas "exacerbate [the] regional imbalance" from the  distribution of natural resources among the provinces.

Now, it is certainly true that there are inefficiencies in Canada's tax  arrangements; economists can spot problems with every tax system on the planet.  On the other hand, Jack Mintz, one of the country's leading taxation experts,  has argued convincingly that the oil and gas sector does not get preferential  tax treatment.

Even if it did, though, the Pembina study overlooks the offsetting fiscal  benefits of the petroleum boom. The same 2009 CERI study estimated that from  2008 to 2033, the petroleum industry would generate $409 billion in federal  revenue. Even if we include the royalty payments earned by the western  provinces, the CERI model estimates that the federal government still reaps 36  per cent of all government revenues attributable to petroleum development.

The recently released Pembina Institute study is right to want to consider  the full picture of oilsands development. That report, however, fails its own  test.

Our analysis leads us to conclude that, on the issues of manufacturing jobs  and tax flows, Canadians in every part of the country benefit from the rapid  development of Canadian resources.

Brian Lee Crowley and Robert P. Murphy are the authors of No Dutch Treat: Oil  and Gas Wealth Benefits All of Canada, the first essay in a series published by  The Macdonald-Laurier Institute exploring the economics of natural resources and  the rise of the Canadian dollar, available at www.macdonaldlaurier.ca