Canada: Oiled by Tar or Tarred by Oil?

The disorderly development of Canada's oil resources benefits today's economy, but will leave little for future generations, says Daniel Trefler.
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April 7, 2014

The second in the Canadian International Council’s series focusing on Canada’s place in the global economic order in the run-up to Larry Summers's visit to Toronto, Daniel Trefler offers his thoughts on use of Canada’s natural resources for development .

Canada’s industrial sector is shifting whole hog towards energy. Strategically managed, oil’s vast economic windfall will enable Canada to pursue an agenda of broad-based prosperity. But on our current course we are heading for a train-wreck of Lac-Mégantic proportions.

While oil sands development has long been in high gear, there has been a coordinated reach for the panic button by oil-patch CEOs and Conservative politicians. What is behind the panic? There is little doubt that the inaccessibility of tidewater ports is costing us millions of petrodollars each day. And according to the U.S. Energy Information Administration there is a possibility that world oil prices will drop over the next two decades, costing us even more. But the panic  ‘strategy’ tears at Canada’s economic, political, and social fabric. It leads to short-termism rather than strategic thinking, with the result that we are putting the demands of today’s consumers ahead of the need to invest in the productivity of future generations. The result will be the reverse of what is intended: we will be rich today, but poor tomorrow.

Economics - Disorderly Development

Former Alberta Premier Peter Lougheed presciently argued the need for an orderly development of the oil sands. He offered a cogent rationale – it would increase innovation and drive long-term growth –  and provided a blueprint for implementation. We ignored him. In the rush to develop, we chose to allow costs to escalate, we chose to rely unusually heavily on foreign financing, and we chose to make the environment a tertiary concern. We also encouraged our kids to drop out of high school for unskilled jobs in the oil patch, not telling them that they would eventually swell the ranks of the unemployed if and when the boom turns to bust.  In short, we chose disorderly development.

These are all political choices. Yet I don’t recall any politician laying out disorderly development as a party platform. Parties of all stripes – NDP, Liberal, and Conservative – need to lay out a plan that balances the competing needs of today’s voters against the investment needs of future generations.

Politics - Government Transparency and Regionalization

Harvard professor Benjamin Friedman argues that civil strife is avoided by growing the pie so that society’s members are not caught in a zero-sum fight over resources. Oil has helped us here. But disorderly development comes at a cost. In aggressively pushing an oil agenda, the Conservatives have reduced government transparency in many areas: The muzzling of scientists, the use of omnibus bills, and the increasing vagueness of budget bills all stifle policy discourse.

Disorderly development is also wreaking havoc with our provincial budgeting processes. Most recently, Alberta fell victim to third world boom-and-bust budgeting. In contrast to the fiscal responsibility of the Harper government, Albertan governments have wasted away their oil windfall on goodies for today’s voters. Alberta now has little left for a rainy day. And nothing left for its children.

Disorderly development has also contributed to the growing regionalization of Canadian politics. This must be reversed. A national pipeline, implemented appropriately, could have created a National Dream. The national railroad even provided a template. Instead, pipelines are divisive, not unifying.

Society - Engaging the Next Generation

The rush to oil has disenfranchised our most cherished asset… the young. To reduce costs, companies import temporary foreign workers rather than pay fair wages to the large pool of Canadian unemployed youth. To maintain profits, companies shift the cost of environmental cleanup onto future generations. These costs include remediation of existing environmental degradation (such as tailing ponds) and prevention of future damage (such as leaks into the Athabasca River, pipeline spills, and Exxon Valdez-like maritime tragedies).

Moreover, petro-politics is teaching engaged youths that their concerns about the environment are unimportant. Indeed, the current political context teaches them that civic engagement through formal political organizations is a waste of time because key issues are decided by backroom special-interest politics. The young are hearing the message, and walking away from politics.

Oiled by Tar or Tarred by Oil?

The oil sands bring great opportunity for Canada. But we must acknowledge that our current approach is faltering. Short-termism and disorderly development primarily benefit today’s shareholders at the expense of all other stakeholders. A longer-term strategy is needed, one that focuses on broad-based future prosperity. And not just economic prosperity, but also healthy political institutions and sustainable development for our planet.