Oil and Gas Exploitation in Canadian Western Provinces

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Table of Contents

Introduction
The Economic Benefits of Oil and Gas Exploitation
Appreciation of the Canadian Currency
The Oil/Gas Exploitation Gamble
Economic Disparities
Conclusion
References

Introduction

Oil exploitation comes with direct benefits such as improved tax revenues, employment opportunities, and royalty payments. However, oil exploitation has many costs as well, including environmental damages. In Canada, oil sands, oil, and gas exploitation in the Western provinces of Alberta, Saskatchewan, Manitoba, and British Columbia has increased in pace, fuelled by steady global oil prices. While oil resource exploitation has benefits, it has many inevitable costs and spillover effects. The conversation surrounding oil and gas exploitation in Canada centers on the economic implications and environmental risks of the increased oil exploitation in the Western provinces. This essay assesses the debate on the pros and cons of oil and gas exploitation in relation to its economic benefits and environmental impacts.

The Economic Benefits of Oil and Gas Exploitation

The growth in oil exploitation over the past decade in Canada is attributed to steady global oil prices, favorable tax regimes, freehold rights, and better royalties (Woynillowicz, Comette, & Whittingham, 2014). Data from the Canadian Association of Petroleum producers indicate that, in 2011, crude oil production reached 1.5 million barrels a day and was priced at slightly over $100 a barrel. As the crude oil prices increase, the Western provinces expand their oil/gas exploitation to match the demand. Alberta enjoys the lions share of the Canadian oil and gas production.

Alberta benefits from oil/gas exploitation through oil royalties. In 2013-2014, the provincial government earned over $12 billion in revenue from oil/gas exploitation with royalties accounting for 11.4% of the earnings (Lee & Ellis, 2013). However, a slump in crude oil prices has seen oil royalties decline by up to 25% to about $3.4 billion (Lee & Ellis, 2013). Although the royalty earnings are declining, oil sands remain an important source of government revenue for Canada. Besides being a significant source of revenue for territorial governments, the federal government also earns income taxes of up to $1.5 billion from the sector (Lee & Ellis, 2013). Thus, one of the key economic benefits of oil and gas exploitation is revenue for territorial and federal governments.

Proponents also hold that oil/gas exploitation increases employment levels. According to Gordon (2013), in 2012, the population of employees working in Canadas oil sands was about 22,300, which was about 0.13% of the Canadian workforce. Further, the International Monetary Fund [IMF] (2013) statistics indicate that indirect jobs from the oil/gas sector account for 2.3% of the jobs in the country. The models of the long-term economic impacts of the industry indicate Canadas oil export capacity will increase to 4.5 million barrels per day (IMF, 2013). In contrast, the Conference Board of Canada predicts that production from the oil sands will expand to 4.9 barrels per day by 2035, creating 3.2 million jobs. The predictions utilize input-output models that rely on the present market conditions. Therefore, the models fail to take into account future market changes and constraints that may limit the growth of the industry.

Appreciation of the Canadian Currency

The Canadian dollar or loonie has remained relatively strong against the U.S. currency for the past decade. According to Lefebvre (2006), the Canadian dollar (CAD) is a Petro-currency as its growth in value is dependent on oil prices. The Canadian currency appreciated from an equivalent of US$0.60 to US$1.10 between 2002 and 2007 (Lefebvre, 2006). Despite its stability, observers emphasize that the Canadian currency is overvalued by up to 25%. As a result, the competitiveness of the countrys exports, which tend to be expensive than similar products from other countries, has been dwindling over the years. Therefore, trends in oil prices have had a direct bearing on Canadian currency valuations. The value of the currency is dependent on crude oil/gas demand.

The IMFs assessment of the currency established that oil prices dictated up to 82% of the fluctuations of the Canadian dollar. Thus, the appreciation of the CAD against the U.S. dollar is driven by oil prices. A recent slump in oil prices has seen exchange at 0.77 against the U.S. dollar. The IMF (2013) attributes the rising commodity prices in Canada to the appreciation of the currency driven by rising oil prices. In this regard, although oil/gas exploitation has strengthened the CAD, it has led to an increase in commodity prices, affecting the competitiveness of Canadas exports.

Nevertheless, a strong currency has many benefits. One such benefit is cheaper imports, including raw materials and inputs required in the manufacturing sector (Lefebvre, 2006). Thus, the strengthening of the CAD against the U.S. dollar will lower the cost of imports, translating into a boom in the manufacturing sector. Consumers also benefit from a strong local currency, as they purchase imported items or travel abroad at cheaper rates. Up to 40% of the inputs required by the Canadian manufacturing industry are imported. In addition, a strong CAD fuelled by oil exploitation can enable manufacturers to import industry equipment and machinery from overseas markets at low prices.

Some economists hold that the appreciating currency has slowed down Canadas economy. Gordon (2013) establishes that Canadas mean productivity between 2000 and 2007 was negative 0.04%. He argues that the slow growth is indicative of declining exports. In addition, despite cheap imports occasioned by a strong CAD, investment in the manufacturing sector has been declining. Gordon (2013) also notes that investment in manufacturing has declined by about six percent to 8.4% between 2000 and 2012. The low capital investment in the production industry is attributed to expensive Canadian exports due to the overvalued currency.

The strong currency resulting from the oil boom has had an effect on manufacturing in the Eastern provinces of Ontario and Quebec. A report by Beine, Bos, and Coulombe (2014) analyzed the relationship between the strong currency, declining exports, investments, and productivity in Canada up to 2011 (p. 474). A strong correlation was found between investment in production in Ontario and the strong CAD. Thus, the high dollar led to expensive Canadian exports, which affected investment in the production sector. A decline in demand for Canadian exports affects long-term productivity in the Eastern provinces. According to Lefebvre (2006), productivity in Ontario began to decline in 2003 when the CAD began to appreciate against the U.S. dollar. Thus, while the oil boom has had substantial economic benefits, it has raised production costs for firms in Quebec and Ontario, making Canadian goods less competitive.

The appreciation of the CAD has also increased Canadas reliance on imports. A report by Beine, Bos, and Coulombe (2014) revealed that the manufacturing sector in Canada is heavily reliant on foreign inputs, a scenario that will affect productivity in the long-term. Therefore, the oil boom will have an indirect effect on the manufacturing sector in the long-term. It has eroded the competitiveness of local products in the international market, leading to a decline in export revenue. While oil exploitation has benefitted to oil-rich Western provinces, it has affected the manufacturing sector in the Eastern regions. Analysts contend that the situation is likely to widen the economic disparity between regions.

The Oil/Gas Exploitation Gamble

Analysts have advanced various arguments in relation to the potential challenges of oil/gas exploitation in Canada. Lefebvre (2006) observes that the demand for oil products is close to a tipping point. The central argument is that with the continued dependence on oil, the demand will soon reach a tipping point before oil prices begin to drop. Observers warn that the demand for oil will decline in the future as cheaper and cleaner alternatives become available. Thus, the exploitation of oil resources may be affected by the absence of profitable markets to purchase oil products.

Gordon (2013) warns that the resource-driven boom may come to a dramatic end as the demand is projected to decline (p. 3). The market is gradually shifting to renewable energy sources in light of the mounting international pressure to cut carbon emissions. Therefore, the change in global oil consumption is likely to affect oil/gas exploitation in the Western provinces. Most oil reserves contain unburnable carbon that cannot be exploited safely because of their bountiful carbon emissions. Claims for oil reserves determine the net worth of fossil fuel firms. Thus, unburnable carbon deposits coupled with a drop in global oil prices, have implications for the valuations of energy firms. A decline in valuations will affect the oil/gas demand and prices, creating a carbon bubble.

The Western provinces are carbon-intensive. Analysts note that the market capitalization of energy firms is likely to be affected by falling oil prices. In 2011, oil firms listed on the Toronto Stock Exchange had a combined net worth of about $379bn (Lee & Ellis, 2013). However, the current market volatility may affect the market capitalization of these firms.

Canada is also prone to the carbon bubble because oil sands tend to be costly to exploit (Horne, Demerse, & Partington, 2013). Therefore, if the global demand for oil declines, it becomes costly to exploit the oil sands profitably. In addition, commitments to reduce carbon emissions and meet global climate targets will see Canada cut down its oil sands exploitation, which is projected to reach 3.1 million barrels a day by 2020, in provinces such as Alberta (Horne, Demerse, & Partington, 2013). Reduced oil sands production will affect the revenue and growth of the sector.

The Canadian federal government is devoted to international obligations, including the Copenhagen Accord, on limiting greenhouse gas emissions. However, implementing the accord has potential implications on oil/gas exploitation. According to Lemphers and Woynillowicz (2014), the federal government has no clear policy on how to reduce carbon emissions in line with global agreements and sustain its development projections. Lemphers and Woynillowicz (2014) further note that oil exploitation in Canada will emit 72 Mt of greenhouse gases by 2020, an amount that exceeds the 67 Mt of carbon sequestered by other industries (p. 16). In this regard, as Canada moves to reduce carbon emissions, oil exploitation in the Western provinces is likely to go down.

Delays in implementing the regulatory guidelines have affected capital investments in the oil sector. The regulations to cut carbon emissions by 17% based on a 2005 baseline were to come into force in 2013; however, the government is yet to implement the laws (Lemphers & Woynillowicz, 2014). Oil companies have also increased their investments in low-carbon energy sources. The aim is to reduce reliance on oil/gas exploitation and provide diversification opportunities for industry players. Therefore, international commitments, volatile oil prices, and high development costs make oil exploitation in the Western provinces a revenue gamble for energy companies.

Economic Disparities

The issue of widening economic disparities between regions features in the oil debate. The ECD established that oil sands exploitation in the Western provinces is creating regional disparities, as other regions are being affected by negative externalities associated with the appreciating dollar (Lemphers & Woynillowicz, 2014, p. 18). Thus, the economic benefits of oil exploitation are limited to the Western provinces endowed with oil sand reserves. Regions dependent on manufacturing, such as Quebec, have experienced slow growth due to the appreciating dollar. According to Lee and Ellis (2013), the GDP in Quebec shrunk by 19 percent, while that of Ontario declined by 20 percent between 2001 and 2012. The provinces depend on manufacturing, which has been declining in response to a strong currency that makes exports less competitive.

In contrast, oil-producing provinces have been experiencing sustained economic growth over the past decade. Provinces such as Alberta, Labrador, and British Columbia recorded a GDP growth of 30 percent between 2001 and 2012 (Lee & Ellis, 2013, p. para. 6). There is also a disparity in the volume of exports coming from different provinces. The oil exports from Western provinces outweigh agricultural and commodity exports from regions such as Ontario. Commodities from the oil-producing regions dominate the Canadian export market.

It is evident that some regions have benefitted from the oil boom more than others have. Quebecs productivity and exports have been declining over the last few years. In contrast, Alberta has experienced growth in GDP and employment, fuelled by the oil/gas exploitation. According to the Government of Alberta (2015), Albertas GDP will grow by 95%, while employment levels will increase by 86% by 2020. The growth is attributed to the expansion in oil/gas exploitation in the region.

It is worth noting that the economic benefits of oil sands exploitation are limited to Alberta. Lee and Ellis (2013) point out that the impact of oil exploitation has been felt in the transportation, administrative, and manufacturing sectors in other regions (para. 8). In recent years, Canadian products have from central and eastern regions have become less competitive in the global markets. As a result, some manufacturers are shifting their focus from exports to supplies required in the oil industry (Lee & Ellis, 2013). However, growth in the oil industry is projected to decline, affecting the demand for supplies. Additionally, the appreciating dollar makes domestic inputs more costly than imported ones.

Therefore, foreign suppliers stand to benefit more from oil sands exploitation than local ones. Landon and Smith (2010) observe that foreign countries share of supply-related employment will reach 27% compared to 54% for Alberta and 19% for other provinces (p. 9). Thus, oil exploitation is likely to have asymmetric impacts across the provinces, given the increasing dependence of the Canadian economy on oil reserves. The resource imbalance in the country has had a big impact on the revenue-raising capacity and economic development of each region.

Corporate tax preferences also contribute to economic inequalities. According to Woynillowicz, Comette, and Whittingham (2014), oil firms receive substantial tax write-offs and tax relief, which significantly reduces payable corporate tax. The Canadian constitution assigns property rights to the provinces. Thus, oil-rich provinces benefit immensely from resource royalties, contributing to widening regional inequalities in the country.

In recent years, new pipeline projects have been launched across Canada. The aim is to link different regions to open up new markets and bridge economic disparities. However, as Landon and Smith (2010) point out, oil sands exploitation in the Western provinces is widening regional disparities in terms of GDP growth, employment, and tax revenue (p. 11). Much of the economic benefits of oil exploitation are felt in Alberta and the U.S., which supplies the inputs required by oil firms at competitive prices.

Besides, other Canadian regions bear the risks of the pipeline network that transports oil to port cities for export. Analysts claim that the leak detection systems in most pipelines are weak, posing significant environmental and health risks to communities (Woynillowicz, Comette, & Whittingham, 2014). Further, experts observe that the economic costs of oil leaks outweigh the expected benefits. Therefore, the tradeoff between the risks of oil exploitation and its benefits are unequal across Canada. In the central and eastern provinces, the benefits are minimal compared to the western provinces, such as Alberta. In addition, the environmental and health risks pose a threat, especially in Quebec.

Albertas economic performance is tied to oil/gas revenue. Albertas revenue earnings from oil over the past ten years are higher than those of Ontario, British Columbia, and Saskatchewan. Thus, oil/gas exploitation fuels Albertas development. However, the downsides of overdependence on oil have brought challenges unique to Alberta. Pressure on infrastructure, hampered growth in other sectors, and housing scarcity are some of the challenges that Alberta is facing.

Conclusion

Oil/gas exploitation in the western provinces of Canada has elicited a debate over its benefit/risk tradeoffs. While the benefits are felt in provinces with oil reserves such as Alberta, other regions face significant economic and environmental risks of oil exploitation. The federal policy requires royalties to be paid to provincial governments, which has contributed to widening economic disparities in Canada.

References

Beine, M., Bos, C., & Coulombe, S. (2014). Does the Canadian Economy Suffer from Dutch Disease?. Resource and Energy Economics, 34, 470-477.

Gordon, S. (2013). The Canadian Manufacturing Sector: 2002-2008: Why is it Called Dutch Disease?. Toronto: SPP Research Papers.

Government of Alberta. (2015). Albertas Oil Sands, Economic Benefits: Benefits too Canadians. Web.

Horne, M., Demerse, C., & Partington, P. (2013). Getting on Track for 2020: Recommendations for Greenhouse Gas Regulations in Canadas Oil and Gas Sector. Edmonton: Pembina Institute.

International Monetary Fund [IMF]. (2013). Canada 2012 Article IV Consultation, IMF Country Report No. 13/41.

Landon, S., & Smith, C. (2010). Energy Prices and Alberta Government Revenue Volatility: Commentary 313. Toronto: C.D. Howe Institute.

Lee, M., & Ellis, B. (2013). Canadas Carbon Liabilities: The Implications of Stranded Fossil Fuel Assets for Financial Markets and Pension Funds. Web.

Lefebvre, M. (2006). Petrocurrency: Good or Bad for Canadas Economy?. Economic Viewpoint, 1, 1-2.

Lemphers, N., & Woynillowicz, D. (2014). In the Shadow of the Boom: How Oilsands Development is Reshaping Canadas Economy. Edmonton: Pembina Institute.

Woynillowicz, D., Comette, P., & Whittingham, E. (2014). Competing in Clean Energy: Capitalizing on Canadian Innovation in a $3 Trillion Economy. Toronto: Pembina Institute.

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