According to the International Energy Agency, falling prices are the byproduct of dramatically increased supply from countries like the United States, coupled with a more worrisome decline in global demand and what that says about global economic growth generally.
Yet, the impact of the rapid decline in oil prices on Canada is another sobering reminder of the country's vulnerability as a major exporter of basic commodities like energy. In his most famous study, The Fur Trade In Canada (1930), Harold Innis described Canada's perpetual status as a resource economy, and Canadians themselves as the "hewers of wood and drawers of water." Indeed, while Canada might be firmly entrenched in the ranks of rich, industrial economies, the parallels with developing economies dependent on natural resources are hard to ignore.
Whoa! The Loonie
In parallel with the decline in oil prices has been the precipitous decline in the value of the Canadian dollar. When foreigners consume lots of Canadian commodities, that demand is reflected in a correspondingly high demand for Canadian dollars. In fact, as recently as July 2011, the Loonie was worth US$1.04 as robust demand for Canadian commodities in Asia and elsewhere contributed to a significant appreciation. Yet, as the price of oil has declined, so too has the Loonie, closing Friday at just US$0.77.
This phenomenon is a double edged sword for Canada. On the one hand, a valuable Loonie driven by a resource boom is problematic for Canada's manufacturing sector since those products become relatively more expensive for foreigners to purchase. On the other hand, while a declining Loonie is trouble for Canada's extractive industries, it is bringing some relief to value-added manufacturers by making their products more competitive abroad.
Yet, there are also dangers in a depreciating Loonie. While the decline in the Loonie's value has cushioned the blow of lost revenue from declining oil prices, a currency's depreciation could be a sign of trouble ahead. First and foremost, it is a signal that fewer people want what Canada is selling (resources). That is unambiguously bad. Just a few years ago (January 2002), the Loonie was trading below US$0.63, making Canadian assets cheap, but reflecting the lack of demand for them, and further opening those assets up to possible acquisition through foreign direct investment. Moreover, a cheap Loonie might create a short-run windfall for manufacturers, but because Canadian productivity gains often depend on imported(and therefore relatively expensive) technology, some worry those investments will be put off, undercutting longer-term competitiveness.
Diversification of the Canadian Economy?
Canada is a small open economy, heavily dependent on international trade for its standard of living. Indeed, one common measure of a nation's openness (vulnerability) to the global economy is the sum of exports (x) and imports (m) as a percentage of GDP. In 2013, Canada's GDP hovered around US$1.8 trillion. International trade (x+m) alone accounted for US$956 billion, or 53.6% of GDP, making Canada one of the world's most open economies. However, that openness is a double edged sword, particularly where commodities exports like energy are concerned. In 2013, energy products accounted for 23.6% of Canada's overall exports, or 6% of GDP (Source: StatsCan). Falling energy prices bite.
Geoffrey Hale of the University of Lethbridge has compiled some similar numbers for energy-rich Alberta, all of which paint a sobering picture of the role commodities play in economic growth. With Geoffrey's permission, I have included some of his data below.
Strategic Priorities, Dispersed Borderlands, Trade Corridors and
Alberta’s Major Exports
The
implications of “borders” and “globalization” for market flows – whether of
goods, capital, or people – to Alberta’s economy and society are heavily
defined by the nature of its traded sectors. Alberta`s economy has become more
diverse since the mid-1980s (see Table 5). However, the same cannot be said for
the province`s export sector. Alberta’s merchandise trade has been dominated by
energy products for many years, with secondary export sectors including
agricultural, processed food and beverage products (especially meats, grains,
and oilseeds), chemical and plastics industries, generally as downstream
products of hydrocarbon production, machinery and equipment, and forest
products. Overall export volumes almost doubled between 2003 and 2008 on the
strength of surging oil prices, before dropping sharply in 2009-10 (Alberta,
2014). However, there have been significant internal shifts in the terms of
trade of these exports since the early years of the century, as noted in Table
6.
Table 5
Sectoral Composition of Alberta`s
Economy – 1985, 2013
Percentage Distribution of GDP
1985 2013 1985 2013
Energy 36.1 24.6 Business &
Comm. Services 5.5 10.6
Finance, Real Estate 11.0 13.5 Public
Administration 4.8 4.4
Transportation, Utilities
7.7 6.0 Tourism
& Cons. Services 3.8 4.4
Retail, Wholesale 8.1 8.7 Health 3.6 5.0
Construction
6.7 10.7 Education 3.6 3.6
Manufacturing 6.0 6.9 Agriculture 3.0 1.9
Source: Alberta Innovation and Advanced
Energy (2014).
Table
6
|
||||||||||
Major
Alberta Exports
|
||||||||||
2010-13
|
%
of
|
2006-09
|
%
of
|
2002-05
|
% of
|
|||||
Annual
Average
|
--
$ billion --
|
GDP
|
--
$ billion -
|
GDP
|
-----
$ billion ------
|
GDP
|
||||
Total
Merchandise
|
101.0
|
30.7
|
85.0
|
33.3
|
61.7
|
33.1
|
||||
Exports
|
%
exports
|
%exports
|
%
exports
|
|||||||
Mineral
Products
|
92.9
|
73.4
|
60.3
|
71.1
|
42.3
|
68.7
|
||||
--
petroleum oils
|
53.1
|
57.1
|
33.4
|
39.3
|
16.6
|
27.0
|
||||
--
natural gas
|
10.0
|
10.7
|
22.5
|
26.5
|
23.0
|
37.4
|
||||
Agri-Food
Products
|
8.0
|
8.6
|
6.8
|
8.0
|
4.8
|
7.8
|
||||
-- meat, live animals
|
2.1
|
2.2
|
2.2
|
2.5
|
2.2
|
3.6
|
||||
Chemicals,
plastics
|
7.2
|
7.7
|
7.1
|
8.4
|
5.1
|
8.2
|
||||
Machinery,
etc
|
4.1
|
4.4
|
4.3
|
5.0
|
3.1
|
5.0
|
||||
Forest
Products
|
2.2
|
2.4
|
2.3
|
2.7
|
3.0
|
4.9
|
||||
--wood
products
|
0.6
|
0.6
|
0.8
|
0.9
|
1.6
|
2.5
|
||||
--
pulp products
|
1.6
|
1.7
|
1.5
|
1.8
|
1.5
|
2.4
|
||||
Source:
Canada Merchandise Trade Database, Industry Canada; author's calculations.
|
||||||||||
Source: Geoffrey Hale, "Engaging Market Flows, Borders and Globalization in Alberta: Switzerland or Uganda?" Paper Presented at Borders in Globalization Conference, Carleton University, September 25, 2014, p.7-8.
"Dutch Disease" Revisited
Much has been made of Canada's emergence as an "energy superpower." But alongside this rhetoric are some very real concerns about the effects of Canada's natural resource boom on the rest of the nation's economy. In 2012, New Democratic Party Leader, Thomas Mulcair suggested the Canadian economy was becoming unbalanced and argued the commodities boom of the day was contributing to job loss in Ontario manufacturing (see link). Mulcair's claim that the commodities boom was raising the value of the Loonie, undermining Canada's industrial production was quickly attacked. Yet, this past February, an IHS study concluded that by 2025:
- Jobs from oil sands are expected to grow 58 percent from today, representing a total of 753,000 jobs, equivalent to 5 percent of total Canadian employment in 2012.
- The contribution of oil sands to Canadian GDP is expected to nearly double to C$ 171 billion in 2025, comparable to adding an economy the size of Saskatchewan today to Canada.
- A more than 100 percent increase in government revenues from the total effect of oil sands investment in Canada, from C$28 billion in 2012 to C$61 billion in 2025. The federal share of revenue (C$28 billion) would be roughly equivalent to what the federal government spent on healthcare transfers to provinces in 2012.
Source: Macartan Humphreys, Jefferey Sachs, and Joseph Stiglitz, eds., Escaping the Natural Resource Curse, (New York: Columbia University Press, 2007), p. 5."In the 1970s, the Netherlands discovered one of these problems. Following the discovery of natural gas in the North Sea, the Dutch found that their manufacturing sector started performing more poorly than anticipated. Resource-rich countries that similarly experience a decline in preexisting domestic sectors of the economy are now said to have caught the "Dutch disease." The pattern of the "disease is straight forward. A sudden rise in the value of natural resource exports produces an appreciation in the real exchange rate. This, in turn, makes exporting non-natural resource commodities more diffiuclt and competing with imports across a wide range of commodities also impossible (called the "spending effect"). Foreign exchange earned from the natural resource meanwhile may be used to purchase internationally trade goods, at the expense of domestic manufacturers of the goods. Simultaneously, domestic resources such as labor and materials are shifted to the natural resource sector (call the "resource pull effect"). Consequently, the price of these resources rises on the domestic market, thereby increasing the costs to producers in other sectors. All in all, extraction of natural resources sets in motion a dynamic that gives primacy to two domestic sectors-- the natural resource sector and the nontradables sector, such as the construction industry-- at the expense of more traditional export sectors."
For anyone living in Alberta in the last decade, this description seems to fit perfectly. As anecdotal evidence, trying getting contractors to come to your house, or observe who is on many Sunday evening flights into Alberta from many other parts of the country (oil and gas commuters). Moreover, those looking for reasons for the "diversification" of the Alberta economy depicted in Table 5 may not need to look any further than the Dutch Disease answers.
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