OTTAWA, May 30, 2012 - Ontario, Quebec and other provinces will enjoy benefits from oil- and gas-rich western provinces that far outweigh any ill effects from a higher Canadian dollar, argues a paper released today by the Macdonald-Laurier Institute.
In No Dutch Treat: Oil and Gas Wealth Benefits All of Canada, authors Robert Murphy and Brian Crowley argue that even provinces not directly involved in oil and gas enjoy large gains from such activity in other provinces. "While the so-called 'Dutch Disease' mechanism may operate, in practice it is . . . offset by the gains to the overall Canadian economy," they write.
The term "Dutch Disease" comes from the experience of the Netherlands following the discovery of oil and gas in the North Sea in the 1970s. Their currency, the guilder, supposedly rose in response, making the country's other exports, like manufactured products, less price competitive in international markets. The existence of "Dutch Disease" is by no means universally accepted by economists. Federal NDP leader Thomas Mulcair recently relied on the concept, however, when he alleged resource development in Alberta had created conditions similar to the Netherlands', devastating Canada's traditional manufacturing sector. Moreover, Ontario Premier Dalton McGuinty also warned that natural resource extraction in Western Canada is hurting Ontario's manufacturing sector.
While it may be that worldwide high commodity prices cause foreigners to buy more petroleum exports and fewer manufactured goods from Canada, the authors point out that the oil and gas industry in turn uses those higher revenues to purchase vast amounts of goods and services in the rest of the country. In effect petroleum-rich provinces become the new "export markets" for the rest of the country. "Canadians in general, including in the manufacturing sector, are enriched by the presence of bountiful resource deposits."
Nor is the benefit to the rest of the country limited to new markets for their goods and services. The evidence is also strong that the entire country benefits from the substantial tax revenues that flow to Ottawa from oil and gas development, allowing Ottawa to offer either new services, reduced taxes, or a combination of the two, for all Canadians.
No Dutch Treat reviews evidence from numerous separate studies on the topic of the economic impact of the oil and gas sector on various parts of the country.
One such study looked at the economic impact of oil sands development over 25 years under four scenarios. In the most conservative scenario, (in which only existing pipeline capacity is considered), there is a "shower of substantial benefit" on Ontario, B.C. and Quebec from the Alberta oil sands development: Ontario would enjoy $64.9 billion in higher economic output and 882,000 person-years of additional employment. B.C. and Quebec would experience GDP growth of $28.8 billion and $14.1 billion respectively.
In the case of the addition of the Keystone and Enbridge pipelines, estimated economic output soars to $95.3 billion for Ontario, $42.4 billion for B.C. and $20.7 billion for Quebec.
In all the scenarios, development in Alberta and other energy-rich parts of the country stimulates demand for goods (including manufactured products) from Ontario and Quebec. "This shows the danger in a naïve assumption of the 'Dutch disease' critique of Canadian energy exports," write Murphy and Crowley.
Other evidence reviewed looked at the entire oil and gas sector (and not just pipelines), estimating that over 25 years the oil and gas output from Alberta alone would increase Ontario's economic output by $116.2 billion (plus 88,000 full-time jobs) and B.C.'s output by $12.4 billion.
Evidence from yet a third study, this time of the Enbridge Northern Gateway Pipeline, found that the pipeline would generate $3.4 billion in labour income for Ontario, $5.1 billion in GDP and 51,216 person-years of employment (equal to 1,500 full-time jobs through 2046) even while conservatively assuming no increase in oil output. If the pipeline allowed an increase in oil production the economic benefits would be even more substantial.
Tax revenue from oil and gas development is another huge gain for Canadians in every part of the country. The authors explain how the evidence shows that the Canadian energy industry will generate $408.6 billion in federal tax revenues and $291.6 in provincial revenues over a 25-year period. In addition, the governments of Alberta, B.C., Saskatchewan and Manitoba will reap royalties of $428.9 billion from petroleum activity over the same period.
Contrary to the widespread belief that all natural resource related revenues flow to the provinces that own the resources, the federal government will receive 36 per cent of all tax and royalty payments generated by oil and gas development.
According to the paper's co-author, Brian lee Crowley, "All the evidence reviewed shows that the surprisingly diverse benefits generated by energy development, particularly in the West, redound to the benefit of Canadians everywhere. Fears that oil and gas development creates winners in a few provinces at the expense of numerous losers in other regions is not borne out in the evidence. On the contrary, that evidence suggests that benefits are both substantial and surprisingly broadly distributed nationally."
This is the first in the High Dollar series of Commentaries on the benefits of the Canadian petroleum industry to provinces other than the oil- and gas-rich western provinces of British Columbia, Alberta and Saskatchewan.
Robert Murphy runs Consulting by RPM and is the Senior Economist for the Institute for Energy Research, a Washington, D.C.-based think tank. Brian Lee Crowley is Managing Director of the Macdonald-Laurier Institute.
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