Pembina Institute

What’s at the end of the oilsands rainbow?

By Nathan Lemphers

Published in iPolitics (Oct. 29, 2012).

Nathan Lemphers

Picture Alberta’s oilsands. If you’re thinking of gigantic mines, oozing bitumen or smokestacks, think again: according to a new report from the Conference Board of Canada, what you should be seeing is a pot of gold at the end of the rainbow.

The Conference Board’s report, Fuel for Thought: The Economic Benefits of the Oilsands for Canada’s Regions, seeks to show that industrial activity in the oilsands is good news for all of Canada.

No one would disagree that the oilsands industry represents a significant source of current and future wealth in Canada. And it’s good news that we’re seeing more and more discussion of what the oilsands mean for Canada: the massive economic and environmental consequences of extracting that oil deserve thorough national consideration.

The Conference Board’s report offers a starry-eyed view of the economic benefits of oilsands development, but comes up short on examining the other side of the balance sheet.

Back in May, I co-authored a report for the Pembina Institute, In the Shadow of the Boom: How Oilsands Development is Reshaping Canada’s Economy, that started to fill in the other side of the ledger by looking at some of the economic downsides for Canada of continued oilsands expansion.

For starters, there’s the rising cost of oilsands development. Many folks in Alberta’s oil patch saw potential profits evaporate while operating costs rose 250 per cent over the past decade. As the extended commodities boom continues, we can expect more shortages of material, which in turn will continue increasing the already high capital costs. Many economists are also predicting a massive shortage of skilled labour in Alberta, driving wages even higher and pushing down profitability and expansion forecasts. Significantly higher costs in the oilsands push up the price of doing business in Canada across the entire economy — not just within the oilsands industry — making it tougher for all Canadian companies to compete internationally.

What does this look like? Expect to see an increase in the number of Canadian companies sourcing their materials or labour from outside of Canada. An estimated 25 per cent of all oilsands jobs can be moved offshore, according to management consulting firm Accenture — a prospect the Conference Board only mentions in passing, while failing to monetize the risks of labour and materials being sourced offshore. It also spells more closures of factories, pulp mills and small businesses as they struggle to compete against lower-cost economies. As rapid oilsands development and the global commodities boom pushes up the cost of doing business in Canada, the supposed economic benefits destined for other provinces may very well fail to materialize as more of the supply chain shifts overseas.

For some companies, a rising dollar also makes it tougher to compete. The continued weakness of the U.S. economy, rising global commodity prices and Canada’s booming natural resource exports will very likely drive up the value of the loonie. A higher dollar helps to make foreign-priced goods less expensive for Canadian buyers, but it also makes Canada’s exports more expensive on the global market.

Indeed, back in 2010, the Conference Board of Canada itself was warning that a strong dollar represents a double-edged sword. Striking a very different tone than the celebration of the oilsands in their most recent report, the Board’s 2010 analysis discussed the risks of a high-dollar environment for some Canadian companies and sectors, concluding that a “do-nothing approach is not a viable option.” They even went so far as to say that the “conditions for Dutch disease are already occurring in Canada” and that doing nothing creates a “much greater risk of contracting a serious case of Dutch disease.” For those who missed the fury of the punditry this spring, Dutch disease happens when commodity exports drive a currency upwards, making it more difficult for non-commodity industries to compete internationally.

Industry Canada and the Government of Alberta funded the Conference Board’s report. Unfortunately, it doesn’t offer Canadians much in the way of new insight into how to optimally manage oilsands development, and willfully turns a blind eye to the economic downsides. If oilsands development is to happen responsibly and extend its benefits across the country (and generations), our government leaders must shift from “selling” the oilsands resource to stewarding it.

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