In Defense of the Petro-State: Canada Should Not Shun Oil Riches

Doha, pictured above, has become one of the wealthiest cities in the Middle East thanks to Qatar’s abundance of natural gas

An article that appeared in last week’s New York Times, by Thomas Homer-Dixon, a professor at Canada’s University of Waterloo, claims that Canada is slowly turning into a petro-state, and that the U.S. would be doing the country a favor by putting obstacles in the way of this evolution and rejecting the Keystone XL pipeline.

The editorial, titled The Tar Sands Disaster, makes the case that countries reliant on oil production suffer from more drastic boom-bust cycles, and are less innovative and democratic, and that for these reasons, as well as its environmental effects, Canada is better off without the oil sands.

A cursory look at a list of the world’s oil producers would seem to support this argument, with a number of despotic Middle Eastern states, autocratic Russia, and Venezuela, which is a democracy, but an unstable one with a dysfunctional and imbalanced economy, among the biggest producers.

A closer review of the world’s petro-states suggests however that oil revenues are not the culprit behind the problems that afflict them, and that in many cases, a robust oil industry mitigates their problems and contributes significantly to boosting their innovation and civil institutions, and raising the standard of living of their citizens.

The Middle East

Saudi Arabia, with its absolute monarchy, restrictive religious laws and single-faceted petro-economy is the principal example that a proponent of Homer-Dixon’s argument would likely cite to show how oil wealth can distort a country into something that Canada doesn’t want to become, but such an assumption would ignore the fact that Saudi Arabia’s political structure is not very different from its oil-less neighbours.

Next-door Oman for instance has no oil and a very similar culture and ethno-religious make-up as Saudi Arabia, and is also an absolute monarchy with strict Islamic laws.

For every oil-rich absolute monarchy, like Abu Dhabi, there is an oil-less absolute monarchy, like Jordan.

It’s true that oil-poor Middle Eastern countries are not singularly dependent on oil revenues the way Middle Eastern petro-states are, but it’s also true that they are much poorer, and are producing considerably less innovation as a result.

A boom bust cycle comes with oil-revenue dependency, but then we must ask ourselves: is it better to suffer the boom and bust of going from being very rich, to merely rich, that residents of Abu Dhabi face, or being consistently poor like Jordanians?

Innovation has also not been shown to suffer as a result of oil wealth.

Dubai, a relatively oil-rich emirate within the very oil-rich United Arab Emirates, is now the centre of entrepreneurial activity in the Arab Middle East. Other Persian Gulf states like Qatar are managing to attract investment from multinational technology companies like Microsoft by using their energy wealth to make themselves attractive locations for opening new research facilities and regional headquarters.

Dubai also contradicts Homer-Dixon’s argument that oil wealth encourages a closed culture, given it is one of the most international and open jurisdictions in the region.

Homer-Dixon might point to Iran, with a political structure combining authoritarian religious theocracy and parliamentary government, extensive press restrictions, and a foreign policy marked by conflict and tension, as an example of what oil wealth can do to a country.

He would have to explain though why Afghanistan, which is just across the border from Iran, shares many of the same languages and ethnicities with its larger neighbour, and has no oil, was for 20 years under some of the most fundamentalist Islamic political movements in the world, most notably the Taliban.

Iran, even now as it is targeted by a Western alliance seeking to choke its economy, is an island of stability and moderation relative to Afghanistan, which is why millions of Afghan refugees live in Iran and not the other way of around. Oil revenues, even depleted by sanctions, are likely the reason for the difference.

This is by no means an exhaustive analysis of the region’s oil producers and their oil-poor counterparts, but it shows how easily Homer-Dixon’s theory can be put into question by teasing the effects oil revenues from those of culture and regional dynamics.

Dutch disease

The editorial repeats the oft-made claim that Canada, as a result of its oil sands riches, is suffering from Dutch disease, which is a theorized economic phenomenon whereby natural resource extraction expands at the expense of a country’s manufacturing sector, by diverting labour to service sectors that support the resource sectors, and capital to resource extraction projects.

He writes that “Canada’s record on technical innovation, except in resource extraction, is notoriously poor. Capital and talent flow to the tar sands, while investments in manufacturing productivity and high technology elsewhere languish.”

The assumption inherent here is that technical innovation in resource extraction is less valuable than innovation in manufacturing productivity.

A review of American economic history contradicts this belief. A recent study on the causes of the breakneck rate of industrialization the United States experienced during the 19th century concludes that extraction of its more abundant natural resources was one of the major factors that gave the rising American power the developmental advantage over its contemporaries in Europe and elsewhere.

Norway is another example of a country prospering as a result of a robust resource sector. It is the sixth largest oil exporter in the world, which has made it the wealthiest of the Nordic countries, with a per capita income of $97,254.

The oil revenues have helped Norway amass $684 billion in the Government Pension Fund of Norway, the second largest sovereign wealth fund in the world, making the country among the most prepared for an economic bust, not the most vulnerable as Homer-Dixon’s thesis on petro-states contends.

On the innovation front, Norway does not have a Nokia, like Finland, or an Ericsson, like Sweden, but it leads the world in offshore oil production and exploration technology, and last year began a four year trial of running a thorium nuclear reactor, which holds the potential to make cheap and environmentally friendly energy available to the world.

These areas of innovation, while not glamorous, are no less important than mobile phones.

Ideology over economy

Homer-Dixon’s economic ideology, which is very popular among that segment of the Canadian population which strives to have a social conscience, is ultimately one that does not see fossil fuels as a worthy resource.

The long-term cost of the pollution, environmental degradation, profiteering, materialism and waste that the availability of cheap hydrocarbon resources encourages is seen to outweigh its benefits.

The road to prosperity and a better quality of life, according to this world-view, is to focus on developing technology that increases energy efficiency and allows a country to do more with less, like clean energy, information technology and high-tech manufacturing.

It is a world-view that holds that no compromises need to be made in the interest of environmentally friendly economic development, but it is idealism, not reality.

Energy consumption has expanded 30 fold since the beginning of the 1800s, and without this ramp up in the availability of energy, the gains in life expectancy and standard of living would not have been possible, and seven billion people, each of whom contributes to the world’s repertoire of knowledge, could not be supported.

Without a doubt, the resource extraction required for the increase in energy production over the last two century has disturbed large swathes of pristine wilderness, has dumped billions of tons of pollutants into the air, ground and water, and has cost millions of lives through its environmental effects, but in the aggregate, greater availability of cheap energy has improved living conditions more than it has degraded them, as every human development indicator makes evident.

Ultimately, it is ideology, not objective economic or quality of life metrics, that is at the root of Homer-Dixon’s anti-oil-industry advocacy, and an honest debate about whether Canadians want their country to become a petro-state would acknowledge that.

B.C. Magnate Gets One Step Closer to Kitimat Refinery

The proposed Kitimat oil refinery would be one of the largest in the world, and would turn bitumen from Alberta’s oil sands region into refined products like gasoline, diesel and jet fuel (Walter Siegmund)

David Black, a British Columbia-based newspaper publisher and billionaire whose idea to raise financing for a refinery in Kitimat was largely dismissed by the oil industry when first proposed last August, saw those plans take a big step toward reality this week with the announcement that a major investment firm was ready to back the project.

Switzerland-based Oppenheimer Investments Group said this week that it is willing to lend the necessary $25 billion to build the mega refinery, which would convert heavy bitumen to light refined products like gasoline, diesel and jet fuel, for export to world markets.

The refinery would reduce the environmental risk of energy products exported from Canada’s Pacific Coast, due to the reduction of bulk of the product, and the fact that refined products are lighter and quicker to dissipate in the event of a spill than the heavy bitumen that would be transported from Alberta.

The refinery would also earn significant revenue by adding value to the raw materials extracted in the Alberta oil sands. Its construction would employ an estimated 6,000 people, and create more than 3,000 permanent jobs once it is up and running.

When Black proposed the project late last year, many pundits and oil industry insiders argued that Canada’s environmental regulations and relative lack of investor interest made the project infeasible, and that it would be easier to build refineries in India or China.

Black says it makes business sense to build the plant in Northern B.C. due to

  • the low cost of the oil feedstock it receives from the oil sands region of Alberta
  • the much lower cost of natural gas in the province, which would power the refinery
  • the scale of the refinery, which would reduce per unit refining costs
  • the reduced shipping costs of transporting refined products vs shipping raw bitumen, and transporting from the Pacific Coast rather than the U.S. Gulf Coast

It would be the largest single investment in B.C. history, with $16 billion for the refinery, $6 billion for an oil pipeline, $2 billion for a natural gas pipeline to power the refinery, and possibly new tankers for $1 billion.

Immigrating to Canada to Escape American Election Results

Resource hubs like northern Alberta's oil sands offer prospective immigrants numerous jobs, which can be the best first step to immigrating to Canada

When Americans look for a country to flee to in the event of their favoured candidate losing the presidential elections, they inevitably look to Canada, their (mostly) English speaking cousin to the North.

For the past three decades, it has been predominantly supporters of Democratic candidates that have made the immigration ultimatum, as Canada has been perceived to align with their party on foreign policy, income redistribution, and cultural issues.

This election season though, the warnings of immigrating to Canada have taken on a more bi-partisan quality, as Canada’s lower government debt levels, stronger economy, tighter control over illegal immigration, more reserved culture, and what many perceive as overall more functional governance, appeals to many conservative-leaning voters.

The growing appeal of Canada to American conservatives also stems from a strong personal dislike that many of them have for Obama, for reasons both ridiculous/bigoted – e.g. conspiracy theories of Obama being a secret Muslim – and ideological.

Whatever the appeal, the number of Americans who actually follow through with their threats and make the move is few. There is no statistically significant spike in immigration levels from the U.S. following presidential elections.

The length and complexity of the Canadian immigration process requires a significant investment of time and a long-term commitment that political passions typically do not motivate.

Immigration Pointers

If you are an American and, having read all of this, still intend to move to Canada, keep these points in mind:

  • Getting a job in Canada is the most practical way for Americans to become landed immigrants. Having Canadian work experience confers significant advantages for foreign nationals applying for Canadian permanent residency through several immigration programs.
  • Occupations not traditionally viewed as prestigious, like heavy duty mechanics and welding, can give you the best opportunity of getting a job offer and a work permit in Canada, which will start your process of becoming a Canadian.
  • Less populated provinces with booming resource-industries, like Alberta, have better job markets and easier paths to immigration than the immigrant magnets of Vancouver, Montreal and Toronto.

As an American, you can take comfort in the fact that you will likely have an easier time immigrating than the nationals of many other countries, as proficiency in one of Canada’s official languages (English and French), is one of the most important criteria in Citizenship and Immigration Canada’s assessment of a permanent residence application.

Canadian Non-Partisan Think Tank Finds Oil Sands Greatly Benefit Country’s Economy

A technician at Syncrude, the largest producer of crude oil derived from the Athabasca oil sands (Syncrude Canada Ltd.)

The Conference Board of Canada (CBoC), the largest non-partisan think tank in Canada, has published a study today showing that development of northern Alberta’s Athabasca oil sands will create over 3.2 million person-years of employment in Canada over the next 25 years, a third of them in provinces other than Alberta.

The CBoC report projects $364 billion in investment will be made into developing Canada’s oil sands deposits over the next 25 years, which will create 880,000 person-years of employment in projects directly related to oil sands development and 1.45 million in production of goods/services linked to the investment through the supply-chain.

The combined 2.3 million person-years of employment are projected by the study to earn $172 billion in income, which will generate another 880,000 person-years of employment through the wealth effect of the employees spending their income.

The report estimates that over 90 percent of the direct-effects employment, 70 percent of the supply chain employment, and 59 percent of the wealth effect employment will be generated in Alberta, where the investment activity will occur.

Other Canadian regions will benefit in the order of Ontario, deriving the largest benefit, then BC, Quebec, the Prairies, and Atlantic Canada, which will see the smallest gain in oil-sands-investment-related employment.

The CBoC report only studied the projected effects of the oil sands investment, and not the oil production itself, which it estimates will be even larger than the investment activity.

The report projects Canadian oil exports will increase by 2.9 million barrels of oil per day (mmbd), from 2011 levels, to 4 mmbd of oil by 2035, increasing direct employment in the oil and gas industry to 175,000.

Continued immigration into Alberta

The employment effects predicted by the CBoC study suggest that high-levels of inter-provincial and international immigration into Alberta will continue for the forseeable future.

Alberta led Canadian provinces last year with a population growth rate of 2.5 percent, thanks to having the highest per capita GDP and, alongside Saskatchewan, the lowest unemployment rate in Canada.

Canada Has Fastest Population Growth in G8, Driven By Immigration and Led by Prairies

The Prairie provinces, prospering from their abundance of natural resources, led Canada in population growth in the year ending June 30th, 2012. Two thirds of the world's potash reserves are near Saskatoon, pictured above, the largest city in Saskatchewan.

A Statistics Canada report released today estimates that Canada’s population grew by 1.1 percent in the year ending June 30 2012, giving it the fastest population growth among the G8 countries.

In comparison, the second fastest growing population in the G8 was that of the United States, which grew by 0.7 percent over the same period. Japan, with its shrinking population, had the lowest population growth rate, at negative 0.3 percent.

The largest source for Canada’s population growth was immigration, as the country has continued to sustain the highest immigration levels in the world as a percentage of its population.

Among Canadian provinces, Alberta saw the fastest population growth, at 2.5 percent, as the province, which has the highest per capita GDP in Canada, continued to lead the country in inter-provincial and international immigration and natural population growth.

The economy of Alberta has benefited in recent years from a booming oil sector as production in the Athabasca oil sands, which is one of the largest oil deposits in the world, continues to ramp up.

Other Prairie provinces also saw rapid population growth, with Saskatchewan and Manitoba’s populations growing by 2.1 and 1.2 percent respectively.

A recent Fraser Institute study found that Alberta, Saskatchewan and Manitoba have the best labour markets in Canada, with the lowest unemployment rates and fastest employment growth in the country, thanks to strong performance from their resource sectors.