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Canada’s future: The oil sands?

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Canada’s future: The oil sands?

How did the oil sands and the pipelines needed to transport the stuff become the saviors for Canada?

The rising tide of rhetoric coming predominantly from Alberta and a handful of senior government officials in Ottawa claims that investments in the oil sands and the pipelines will create tens of thousands of jobs, generate hundreds of billions in revenues and income, tens of billions in government revenues, and generally solve our economic and fiscal problems now and forever. Hallelujah – where do I sign up?

But why would a billion dollars invested in the oil sands produce better outcomes than a billion dollars invested elsewhere – education, hospitals, roads, technology, rail track, ports, auto plants, etc.? One can just as easily argue that tens of billions of dollars invested in infrastructure for example would yield comparable economic and fiscal results, and would have the additional benefit of reducing the demand for oil.

When there is excess capacity in the economy, any new investment will help create jobs and economic activity, thus reducing unemployment and excess capacity, and by producing more income will yield more tax revenues for all levels of government. The investment does not have to take place in the oil sands. There is nothing sacrosanct about such an investment.

At this time, there is much less spare capacity (suppliers and labor) available to support investments in the oil sands and pipelines than there is to support other types of investments. Moreover, investments in infrastructure would be spread across the country rather than be concentrated in one or two provinces.

When the economy is operating at capacity (the nightmare scenario for the Bank of Canada), additional investments in the oil sands and pipelines will siphon resources and investments from other areas. Unless an investment in one activity leads to a long-term increase in our productivity growth rate, investments take on the attributes of a zero-sum game. More investment in one activity leads to less investment in another without any net improvement in employment, incomes and tax revenues.

It has been well documented that investments in infrastructure do contribute to higher productivity growth rates over time. The same cannot be said for investments in the oil sands. Thus, why invest more in the oil sands? Why not invest more in infrastructure? Does anyone, other than executives in the oil patch and their various sycophants, really believe that Canada will be better off over time if we invest another $100 billion in pipelines and oil sands plants than in infrastructure and public transit?

Yes I hear the voices wafting in from Alberta that taxpayers will get stuck paying for infrastructure investments. So what if such investments might, in theory, produce more significant, long-term benefits for Canada? Someone will have to pay.

Yes, someone will have to pay –  how about user fees (tolls and higher gasoline taxes)? And what about the higher growth rates in GDP, incomes and tax revenues as the private sector’s competitiveness improves as a result of the infrastructure investments?

On the other hand, who will pay for the massive investments in the oil sands and the pipelines if the optimistic guesses regarding the future path of oil prices and construction costs turn out to be dreadfully wrong? Who will pay for these investments if more governments introduce measures to reduce energy demands and carbon emissions? Do we really believe that the Chinese Government will stand idly by as demand for energy rises dramatically, draining the domestic economy?

I can see the same zealots who support the oil sands and the pipelines marching to Ottawa seeking a bailout if their guesses turn out to be wrong. They will argue that once upon a time these investments played a key role in turning around Canada’s economic and fiscal prospects. Yes I can see another case of privatizing profits and socializing risks.

There are many more attractive alternatives to investments in the oil sands pipelines. They are not the salvation for Canada’s economy and the fiscal problems of governments.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.


1 Comment

  1. D. J. Roach December 5, 2011

    The two investments, one private capital, the other public capital, are not mutually exclusive. Private capital is the more mobile; the returns from it support the public capital investment via income, excise and royalty taxes.
    Private capital can be used for public capital purposes via the debt markets, but as has been amply demonstrated in Europe this year, too much public capital investment without concurrent private capital investment in revenue generating projects leads to untenable government deficits and a shut-out of the deficit generating government from the public debt markets.
    Productivity does not necessarily follow from public capital investments. The author presumes that it does, but it is not a given. Constructing a highway into the wilderness would provide a sink for public expenditure, but would not add a point to productivity unless there was a private capital investment in a resource industry at the end of it.
    Constructing more hospitals would add to the public debt, but would not produce an improvement in productivity unless the surgeons, hospitalists, technicians, clinicians and nursing staff were available to staff it, and government revenues were sufficient to pay for the operation, maintenance and staffing of it. The cost of capital, operations and maintenance, in Canada is too great to be recouped from the income taxes and insurance fees levied on the hospital staff and the patients of the hospital alone — the balance must come from revenue generated by unrelated private activities, such as the exploitation of petroleum resources including the ‘oil sands’.
    Absent private investment in revenuing generating projects, such as the exploitation of the Athabasca oil sands, the government runs a deficit until it reaches its debt limit implicitly set by the private capital markets.
    Manufacturing in Canada cannot be relied upon to provide the revenue government requires to meet expectations for public services that prevail today. Service sector tax revenues are likewise insufficient; the services provided by the sector are largely untradeable and for the most part provide a negative balance of trade effect.
    In view of a declining manufacturing competitiveness, Canada is forced to rely on resource industries and agriculture to provide its foreign reserve requirements. Oil sands source petroleum and agricultural chemicals production are the two commodities that Canada can produce competitively and which have potential for output growth. That these are located in the West is simply a result of geology and geography. Earlier in Canada’s industrial development, the resource base was sited in Ontario and Quebec where metallic and non-metallic ore resources were intensively exploited and fed an expanding metal processing industry and growing government services and public capital investments. At that time, private capital investments and private company activities led government services as the source of productivity gains, and not the other way around.
    Manufacturing in Ontario and Quebec or British Columbia does not appear to have much in the way of growth potential, and if recent studies are to be believed, the productivity in that sector is not expected to improve. Public capital investment would not likely help there, except in relieving some of the transportation bottlenecks around the major metropolitan areas in those provinces during commuter rush hours. But here in BC, public capital investment in transportation infrastructure for public transportation (elevated commuter trains, buses, etc.) simply serves to add to the public debt and government deficit without providing much if anything to the improvement in productivity.
    Absent private capital investment in the resource sector, government revenues would be insufficient to maintain current levels of expenditure, let alone increasing rates of public capital outlays. Hence the necessity of exploiting the ‘oil sands’ and other accessible resources that private capital is willing and able to fund, in order to support and provide for the public capital investment that Canada appears to find necessary to maintain its standard of living.

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