Back In The Resource Trap

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Falling oil prices are puncturing Stephen Harper's dream of transforming Canada into an energy superpower. Tom Walkom writes:

For this government, Alberta’s oilsands were the key to Canada’s economic future.

Alberta heavy oil would be sold to the world at premium prices. Spin-offs would provide jobs for Canadians across the country.

It was a coherent vision. But it rested on one thin reed: an oil price high enough to cover the cost of extracting bitumen from the tarsands.

Now, with oil prices expected to remain low for the indefinite future, the entire project looks increasingly iffy.

A couple of things have happened that Stephen Harper didn't -- or wouldn't -- foresee:

The reasons for the oil price collapse are varied. China’s energy-reliant economy is slowing down. New shale oil production from the U.S. is creating a glut. The cartel known as the Organization of the Petroleum Exporting Countries has been unwilling or unable to enforce high prices.

Anyone with a knowledge of history knows that this is an old problem for Canada. Harold Innes called it the "resource trap. And, for most of the twentieth century, Canada's politicians tried to avoid it:

Sensible countries try to lessen their dependence on volatile commodities. Canada, whose economy has been dominated by resource exports since the 16th century, spent much effort over the years trying to do break free from this dependence — usually by encouraging secondary manufacturing. The aim was to diversify the economy so that offsetting forces were created.

A fall in oil prices, for instance, might hurt Alberta’s petroleum sector. But the consequent cheap energy would aid Ontario manufacturers and the country could keep on an even keel.

For years, this was the unstated theory behind what was in effect a crude form of industrial strategy. Much of the time, it more or less worked.

And, if there's one thing Harperites don't believe in, it's having an industrial strategy. Unfettered markets are the way to salvation. Except they aren't.

And, once again, we're caught in a resource trap.

A Tale Of Two Economies

Last week, Jim Flaherty announced that Canada would run a surplus -- just in time for the 2015 election.  Scott Clark and Peter Devries suspect that Mr. Flaherty is playing with magic numbers. But, while Flaherty was trumpeting his projected surplus, Statscan released numbers that were far from magical. The Huffington Post reported that:

StatsCan’s latest numbers on Canada’s trade balance, released Thursday, look positive on the face of it: Exports and imports both grew, and Canada’s trade deficit with the world shrank by more than half, to $435 million.

But dig a little deeper into the data, and what you see is a story of two different export sectors. As BMO chief economist Doug Porter put it in a client note Friday morning, “there is energy (doing just fine) and there is everything else (doing anything but fine).”

While energy exports have seen a $63.6-billion surplus for the past 12 months, everything else has seen a $72.9-billion deficit.

The numbers are remarkable. The hallmark of a strong economy is diversification. But, during the Harper years, Canada has settled into an old nineteenth century pattern -- what Harold Innis called the "resource trap."

While resource extraction booms, manufacturing is on life support. Doug Porter notes that:

manufacturing employment in Canada — which is heavily dependent on exports — has shrunk by 20 per cent since 2000, even as jobs in the rest of the economy grew by a bit more than 20 per cent.

The result is regional disparities which could eventually tear the country apart. For Alberta and Saskatchewan, it is the best of times. For the rest of the country, it is the worst of times.

But, then, it became clear during the past week that the country is run by bobble heads.