REALITY CHECK: Guess who's got the most to lose from rash decisions on economic recovery?

We’re at a moment of economic stress, with competing visions for how Canadian society should return to normalcy through the pandemic crisis ... Stewart Muir looks at the situation.


Road to pandemic recovery ...

It’s plain to see that pursuing successful recovery means choosing responsible utilization of the natural resources owned by each province. Now more than ever we are seeing governments realizing (sometimes reluctantly) that only with industry as a partner can they effectively balance the economic use of publicly owned oil and gas reserves, mineral deposits and forests, with other priorities including local ecosystem maintenance, Indigenous rights, and global climate concerns.

Polarization has led to blurring of one very important issue I'm going to explore here.

With the pandemic, a number of pressure groups have seen the opportunity to hitch their perennial anti-development messaging to the economic recovery issue, as if the Depression-like collapse we continue to experience is an opportunity to create long-term curbs on growth to keep things this way.

Though various strains of this polemic claim to seek "green", "resilient" or "just" recovery, one thing they hold in common is the claim that the principal role of government is to hold in check the insatiable demands of development. They seek to position modern resource companies as the source of the problem.

A small shift in perspective, to that of the resource owners themselves, soon makes clear why governments will not find these proposals as enticing as they might seem at first blush. The reason is this: governments are totally reliant on a healthy economy which includes exports.

Chase away the activities that allow for this effect - really? Who would be so foolish? Idealistic newbies fresh to elected office quickly learn this as the blood drains from their faces during that first briefing from the finance ministry, where they come to the sober realization that no matter the promises that won them the most votes, their spending dreams will hinge on natural resource revenues – the Canadian reality in our past and present, and undoubtedly well into the future.

The fact is, resource companies are able to operate only because governments willingly license them to do so, and permission is granted for a good reason.

British Columbia is like a number of other Canadian provinces in having an especially heavy dependence on natural resource exports, with nearly 80 per cent of goods exports consisting of resource products. Scroll to the bottom of this article for a longer excerpt from a paper that I often cite: "All non-export economic activity, from brain surgery to day care, relies on the economic base as a source of revenue." This is the base from which governments are able to serve the people, and in this regard, it can easily be said that nobody, not even the biggest energy or mining company in the country, benefits from natural resource activity than governments do.

I've spent years looking for a sector of the economy that produces benefits as pervasive as those that flow from natural resource activities. If it's out there, I have not seen any trace of it. (writer David Williams comes to a similar conclusion in this article.)

When it comes to taking a healthy slice of the proceeds for public use, governments are only just getting started when they claim royalties on the valuable substances provided when resource companies dig, harvest or drill. Benefits cascade through the economy because of capital investment, share market impacts, sales taxes, local property taxes, permit fees, income taxes, trade balances, the supply chain of goods and services including manufacturing and secondary employment effects, and the powerful effect that environmental regulations have on research and development investment.

Although we'll often hear mixed messages as various viewpoints jostle for attention via the mechanism of politics, the institution known as the Government of Canada has always been quite clear about the primary importance of resources.

There is little room for interpretation in this statement from Natural Resources Canada: "As a country, Canada is fortunate to have one of the largest and most diverse endowments of natural resources in the world, representing the backbone of the economy and high standards of living." (source here.)

That's an important phrase: Backbone of the economy. If it wasn’t for modern resource corporations (usually publicly traded ones that are subject to multi-layered ethical and transparency rules, not to mention shareholder accountability), governments would have to figure out for themselves how to ensure the economic anatomy of the nation was intact. Based on humanity's past experience with centralized economic planning, I'm just going to leave that one there. 

"Green recovery" pitch means doing without resource revenues ...

Particular pressure is being placed on federal cabinet to make decisions that will deliberately hamper economic recovery by throwing Canada’s primary economic drivers under the bus. We’re already seeing the effect of this with wavering support in Ottawa for Western energy companies, many of them giant employers, that have thoroughly earned their reputation as the engines of the national economy.

As obvious as it is to the informed, the pitches we are hearing about various flavours of “green recovery” are squarely aimed at the idealistic urban mindset, where curiosity about the realities of topics like energy may go no further than the nearest wall outlet.

Yes, the tightly regulated resource industries whose efforts are (figuratively speaking) farmed by every government in the country certainly do have areas that require improvement. Before doing something in haste that we will live to regret, it’s important to recognize that the facts point to a tougher and, ultimately, less green recovery track if we do somehow manage to extirpate the incredible potential of Canadian natural resources to drive economic development and displace higher GHG sources of energy globally.

What it’s too often really about is gaining subsidies for solutions that aren’t yet commercially feasible, at the expense of fiscal stability for the public.

A few years ago, the Ontario government adopted alternative energy solutions that weren’t ready for scaling. Thankfully the province has nuclear and gas to fall back on today, but the province’s taxpayers remain on the hook for $21 billion in unnecessary expenses resulting from that green experiment.

This is wrong because the necessary energy transition ahead of us has to be smooth and rational if it is to survive voter scrutiny and market realities. It’s best we not forget this as, in the words of historian George Santayana, “Those who cannot remember the past are condemned to repeat it.” Rational opportunities exist for new hydro energy, small nuclear, additional electricity corridors, alternatives to diesel generation in the North, and market-driven deployment of all kinds of applicable solutions throughout the energy system.

Often overlooked in all this is that Canada, far from being some sort of climate slacker as sometimes portrayed, is a solid global leader in clean energy. The electricity grid is one of the world’s largest and cleanest, with 82 per cent of it drawn from hydro, nuclear, wind, solar and biofuels. It’s okay for us to breathe for a moment and appreciate that we deserve credit for this. If we get things right, the future of Canada is more of the same.

A progressive-minded solution ...

Many of us who are progressive-minded about environmental protection, trade diversification, energy transition and climate priorities also recognize the need to fully embrace the need for a healthy resource sector. Everyone wins when Canadians can get back to the job of supplying the world with commodities and products like LNG, oil, lumber, pulp, copper, electricity and aluminum that are developed using methods that carry lower GHG footprints than competitor nations’ products, thanks partly to the abundant low-carbon and carbon-free energy available for those processes.

Natural resource companies are used to being vilified as despoilers of Mother Nature. This can be a demoralizing aspect of professional life for those who are in the front lines such as geologists, engineers, business executives, entrepreneurs, civil servants and a vast list of specialized technical occupations. In the seven years since I launched Resource Works to understand the role of material commodities in our Canadian way of life, I have been impressed over and over by the commitment of such individuals to environmental responsibility, hand in hand with meeting investor expectations and providing for societal needs.

If you’ve read this far you quite likely know about these things already, or are open to considering the perspective. In which case you might also be thinking: Fine, but how do we get this across to those who don’t already know what we know? So, I’m going to shift from these ruminations into some practical arguments that might help others to cut through the fog and share with the resiliently skeptical.

FIVE memorable things every Canadian needs to know ...

It's frequently pointed out that facts are not argument winners in the postmodern, post-fact age, because nowadays it's about values. I agree this is true. However, facts still do have a role to play and we shouldn't ignore them. Here are a few verifiable and significant facts that I would argue strengthen the convictions and persuasiveness of those who have come to realize the importance of the work that lies ahead:

 

1.   Resources lead Canadian exports. Oil and gas alone is by far the largest single source of export revenue. Even in the troubled first quarter of this troubled year, 34 per cent of Canadian goods exports came from energy, minerals and metal products. The chart below for 2018 depicts the relative value of goods exports. (Chart from Statistics Canada table 12-10-0134-01, 2018)

2.   Workers in Canada’s mining and oil and gas industries create more value in the economy than any other fields. Not a little bit more, I’m talking about a vast difference. Just sixty minutes of labour by one of these workers brings Canada $304 that it would not have seen otherwise. That is up to fifteen times higher than other industries. (Note that I am not naming and calling out those industries for being “too low”, that’s not what this is about.) The reason for the spread is that those resource workers are producing valued commodities that (and this is key) foreigners pay us money to acquire.

The “green recovery” advocates who are saying we must rid ourselves of these jobs think it would not make a difference if we replace those jobs with ones that do not generate export income. To make this argument, and still have the boldness to claim that the economy will be stronger as a result, is simply ludicrous. No real economist could back an idea that would only work if accompanied by ramping up debt and inviting a massive decline in living standards.

3.   Among other reasons why trade matters is that the currency we bank through exports allows us to import the stuff we need but don’t (or can’t) make ourselves, whether that is iPhones, orange juice or certain vaccines and medicines. 

4.   Canada benefits hugely when things like pipelines, wells, mines, roads and transmission lines are built. First of all, these activities are magnets for foreign investors who otherwise would not have a reason to put their money to work in Canada. Secondly, construction is a massive economic driver that generates high paying jobs and distributes resource benefits all across the country to fulfill the need for manufactured goods made in places like Surrey, the GTA and Golden Horseshoe, and Montreal. Thirdly, because of the stiff regulations that governments at every level apply to these activities, construction drives new technology, better land stewardship and more equal wealth sharing with Indigenous peoples.

When you consider the fact that oil and gas production – not including refining and pipelines – is Canada’s largest attractant of foreign investment, it’s quite sad to learn that investment in the sector is down by $9 billion this year, something that will create difficulties for a lot of families.

5.   Canada has the opportunity to have it all when it comes to achieving true environmental and economic balance. As long as issues like carbon fairness can be addressed (for example, when Canadian-made products are penalized to the advantage of producers from places that lack our climate policies), the coming pandemic recovery offers potential for a step change toward greater long-term stability as a global climate leader.

Natural resources in Canada are the property of the people, via provincial governments. Over the next few weeks, important conversations will occur about how to strengthen the ability of all levels of governments to manage the natural assets that fall under their authority.

This will be a period of opportunity for those seeking to achieve better understanding of issues that most residents seldom stop to think about. Those who owe their livelihoods to participation in the resource economy should be thinking carefully in this period about how to make themselves heard.

 

Stewart Muir ... is executive director of the Resource Works Society.



FURTHER READING ... Excerpt from Regions & Resources: The Foundations of British Columbia’s Economic Base ... by David Baxter, Ryan Berlin, and Andrew Ramlo

The analogy of a bathtub is useful in describing the economy in economic base terms.

Our day-to-day experience in an economy is mainly with the water in the tub, in the transactions of the population-serving component as we buy groceries and get our hair done. The volume of money used in these internal transactions is analogous to the water level of the bathtub. Its flow or churn as people carry out business with each other is therefore analogous to water swirling in the tub.

Population-serving transactions within a region can continue indefinitely so long as nothing is imported from outside the economy. Imports mean money leaves the region in exchange for imported goods and/or services. In the bathtub analogy, importing is the equivalent of pulling the plug out of the bathtub, as it drains money out of the economy – all other things equal, the longer and/or the more we import, the lower the water level in the tub.

To offset the loss of money from the economy that results from imports, there must be a source of income for the region, something that brings money into the economy to ensure, directly or indirectly, that there is sufficient money in the region to at least pay for imports, and at best to exceed them, thereby increasing the size of the economy.

In the bathtub analogy, the tap (exports) must bring in the same amount of water as the drain (imports) takes out of it if the water in the tub (the economy) is to remain at a constant level (neither shrink nor grow). If the outflow (imports) exceeds the inflow (exports), the water level will fall (the economy will shrink) and at some point, in the long run, the tub will be empty, which will mark the end of importing, and likely of inhabitation in the region. Conversely, if exports exceed imports, the water level will rise, and the economy will grow.

Much of government activity is within the tub, taking money from one part of the tub (via income or consumption taxes) and adding it to another (via government spending). In some contexts, governments may act like importers, removing water from the tub to put in another tub, and in other cases they may act like exporters, bringing thimblefuls of water from other tubs to dump in ours.

While imports may define our standard of living, as they represent consumption that could not be produced locally, exports provide us with the ability to pay for them. Thus, the base of an economy is its ability to sell goods and services to residents of other regions, thereby providing the funds to support both population-serving and import activities.

All non-export economic activity, from brain surgery to day care, relies on the economic base as a source of revenue. In other words, both population-serving and importing activities are effectively parasites on the export sector, and as parasites they should have a strong interest in the health of their host.

It is important to note that in the short run, borrowing money from lenders outside the region (external debt) can be used to cover a deficit between imports and exports, as debt brings money into the economy. In the long run, however, external debt must be serviced, and ultimately, repaid.

Due to the fact that the only source of money used to make external debt payments is export income, borrowing outside the economy simply represents a claim (i.e., contracting to send money out of the region) against future export income.