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Prime Minister Mark Carney announces plans for a new oil pipeline from Alberta to the West Coast in Calgary on July 2.Ahmed Zakot/Reuters
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
Faced with a moribund economy and a more uncertain future, the federal government says Canada will exploit its abundant resource endowment to become a global energy superpower. Ottawa paved the path this week for oil producers to double production with a big pipeline announcement. Billions in government money is on the table.
If that’s the plan to revive the economy, it won’t work. We know this because that’s the strategy which the country has used over the last generation, and it has failed to deliver growth.
Canada is already an energy superpower. Since 1990, oil and gas exports have risen four times faster than overall exports, making the country the world’s fourth-largest supplier. Yet throughout this time, the average annual per capita growth rate of the economy has trended relentlessly downward, to the point that it’s now approaching zero. On the current trend, Canada’s average incomes will start declining in the coming years; adjusted for inflation, they’ve already begun to do so.
That’s no great shock. Regardless of what demand projections pipeline promoters can come up with, oil’s relative weight in the world economy diminishes with each passing year. You can see this in long-term price trends. Other than a brief boom during the first decade of this century, the price of oil has either stagnated or fallen for most of the last half century. That brief boom, meanwhile, was a one-off, the result of a global commodity supercycle driven by China’s breakneck industrialization. But that peaked at the time of the global financial crisis, and there’s no compelling reason to expect a repetition.
Perhaps an even better indication of the industry’s long-term prospects can be found in its companies’ share prices. If 15 years ago you had invested a dollar in an oil and gas index tracking fund, it would today be worth about $1.50 – a loss, once inflation is factored in. The same dollar put into a simple S&P 500 index tracking fund would today be worth $6; if put to work in the more dynamic sector of the economy over that time, namely the tech sector via a Nasdaq tracking fund, it would have delivered nearly $10.
So, if Canada now has money to invest, why sink it where the returns are comparatively poor? The global economy is decarbonizing, all while diversifying away from oil and gas imports. In a world in which a U.S. President can simply announce he’ll shut the Strait of Hormuz to anyone who won’t pay a toll, then change his mind a day later, energy sovereignty has become the new holy grail. A growing number of countries want to rely on their own energy supplies, whether those be their own fossil fuels or, increasingly, renewable energy. Mirroring this, global sales of internal combustion engine cars peaked about eight years ago at 80 million, at which time EVs and hybrids were just appearing. Today, sales are down to 60 million, and EVs and hybrids are selling like hotcakes – if not in Canada, certainly in the developing markets from where most future demand will come. Canada feels the weight of sticking with what worked in the past but no longer does: the world’s fourth largest auto exporter in 1990, today’s it’s sunken to ninth place.
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Some may argue that because Canada has a lot of oil and gas in the ground, it makes sense to exploit it and use the money to develop new industries. It’s not a particularly strong argument. For starters, unlike the Gulf states or Norway, which have invested their oil revenues to develop new industries, Canada has consistently spent its royalties. Low taxes might be a boon in Alberta, but there’s no evidence the money saved has been used to develop new economic industries as is happening in those aforementioned countries.
But even were Canada to use its royalties to build new industries, it still may not make sense to plough public dollars back into what increasingly looks like a sunset industry. There is an opportunity cost to everything. Every dollar invested in one industry is a dollar not invested in another that might promise better returns.
Compare China. If back in 1990, when Canada was doubling down on its resource exports, China had used the same strategy of exploiting its existing comparative advantage, it would today be a nation of farmers and an exporter of low-value manufactured products. Instead, it has become a high-tech powerhouse. Exporting no cars in 1990, it now leads the world, thanks largely to its pioneering of electric vehicles, which has left Canada’s industry in the rearview mirror.
You don’t have to be insane to keep repeating a failed economic strategy while hoping for different results, but it helps to be willfully ignorant. It’s incumbent on the pipeline promoters to explain why their approach will work this time, when it hasn’t so far yielded a sustained economic revival. Because otherwise it looks like taxpayers are being asked to ignore the evidence and skip to a conclusion.