February 26, 2013 - MLI's Philip Cross examines the Canadian Centre for Policy Alternative's (CCPA) recent paper, The Bitumen Cliff, in his latest op-ed for the Financial Post. According to Cross, the report "adds to the demonization of the resource boom that has enriched Canada over the past decade." What's wrong with this thinking? Read his full op-ed below.
By Philip Cross, Financial Post, February 26, 2013
'Bitumen Cliff' report demonizes Canada's resource boom
Ever since the staples theory was formulated decades ago, the debate has raged between those who believe natural resource exports can form the basis of sustained growth and those who do not. Canada, one of the richest economies in the world, stands as a testament to the benefits of resource development. But opponents of our reliance on such development are driven to ever more absurd contortions to justify their conviction that natural resources must be bad for us, regardless of what the evidence shows.
The latest example of the anti-resource lemmings marching determinedly off the logic cliff is the just-released paper The Bitumen Cliff by the Canadian Centre for Policy Alternatives (CCPA). This adds to the demonization of the resource boom that has enriched Canada over the past decade. Since the prosperity generated by the resource boom continues to expand, even reaching the beleaguered forestry industry, the paper draws a bead on what it calls the implications of the "bitumen boom."
What's wrong with this thinking? Everything, starting with the title. Bitumen is not an accurate description of Canada's oil patch, never mind the whole resource sector. Bitumen, broadly defined to include all non-conventional oil, accounted for just over half (56%) of all Canadian oil produced in 2011. The rest is crude oil produced by conventional methods. But surely the occasional fact can be sacrificed in the service of saving us from our natural resources.
Now that the notion of Dutch disease (that a booming resource sector leads to a higher exchange rate that depresses manufacturing) has been so discredited that even politicians shy away from its use, the CCPA's paper picks up the old anti-resource argument of the "staple trap." A hinterland (that's us, by the way) exports to an advanced country (the U.S.) that transforms the product and sells it back at a higher price back to the tuque-wearing peasants in the hinterland.
The "staple trap" does not even make any sense for bitumen, the paper's poster boy for resources. We export bitumen to the U.S., which refines it into gasoline which, well, Americans quickly consume in their cars, some built by the Canadian Auto Workers, whose chief economist is one of the paper's authors. The CCPA wants Canada to refine oil here rather than importing it. We already do just that and make billions doing so. Last year, we exported $14.1-billion of refined petroleum products, while importing $11.8-billion. The rising share of raw materials imported into Canada for processing — reflecting many commodities, such as Latin American gold, Jamaican bauxite and North Sea oil — is so contrary to the authors' prejudices that it doesn't even figure in their report.
The CCPA worries that demand for resources could suddenly collapse. That is true for any industry. Our oil exports could be threatened if the U.S. suddenly weaned itself off oil, but don't hold your breath. Good examples of sudden changes in demand are autos and telecommunication and computer equipment, both of which boomed in the 1990s and early 2000s before busts more spectacular than anything our resource sector has ever seen. What export has been most immune to the recent ups and downs of the business cycle? Agricultural products, the most basic of resources.
There's more. The authors say an increase of only 16,500 jobs in oil and gas and 5,000 in mining in the last decade "would seem to be the extent of the direct employment impact" of the resource boom. This incredible claim (saying "would seem" suggests some of the authors were nervous making it) ignores the large and lengthy construction required to build oil sands plants before they produce their first barrel of oil.
The long discussion of falling Canadian exports and our switch to trade deficits after 2008 does not once mention the global recession. Saying the trade deficit "represents an accumulated debt to the rest of the world" ignores that almost half the capital inflows to finance the deficit took the form of direct investment in firms and equities in Canada. Most readers know the difference between debt and equity.
The paper claims the loonie has become a "petro-currency," but is puzzlingly silent on why the growing discount for Canadian oil exports — which it blames on surging bitumen exports– has not pulled down the exchange rate. You can't eat your edible oil product and have it too.
Nor does this exhaust the list of problems the authors have with resources, especially the oil sands. They are "unplanned," for example. Unplanned by whom? The firms who drew up the plans, leapt through the regulatory hoops, raised the capital, hired the workers, built the infrastructure, processed the oil, and found a market to buy it?
One of the great delights of the resource boom over the last decade was how no one predicted it, with prognosticators at the turn of the century promising a brilliant future of university grads making communications equipment at Nortel. The study frets over the uncertain growth of future demand for oil. Unlike, for example, the outlook for the niche of high-priced cars that high wages in the auto industry have confined us to?
In their introduction, the authors denounce "an over-the-top, orchestrated campaign to criticize, even ridicule" those who dislike our growing reliance on resources. Somehow, after reading this report, such a campaign seems unnecessary.
Philip Cross is research co-ordinator at the Macdonald-Laurier Institute and the former chief economic analyst at Statistics Canada.
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