CALGARY, AB, Jan 8, 2014/ Troy Media/ – Any consumer of Canadian business news will be very familiar with the upside of oil sands development. We’ve all read about the tens of thousands of jobs, the billions of dollars in investments, and the taxes and royalties our governments depend on. To hear some tell it, the development around Fort McMurray saved us from recession and will make us a global energy superpower.
No one can deny that oil sands development has brought significant economic benefit. But increased dependence on a volatile natural resource sector carries some risks to Canada as well.
In a report published last month in partnership with Equiterre, a Quebec-based environmental organization, the Pembina Institute explored some of the economic risks linked to rapid and growing oil sands development.
For example, resources have proven to be a particularly volatile source of revenues for Alberta’s government. Over the past 10 years, according to the C.D. Howe Institute, the volatility of Alberta’s government revenues was twice that of B.C., Saskatchewan or Ontario. Budget 2013 in Alberta provided a perfect illustration of this phenomenon: despite record levels of bitumen production, the province rolled out an austerity budget due to a $6.2 billion overestimate of the resource revenues it would collect.
In a country that is prone to regional tensions, the uneven distribution of oil sands benefits also carries some risk. A study by the Canadian Energy Research Institute suggests that Alberta will realize 94 per cent of the GDP benefit of oil sands development, and retain 86 per cent of the jobs associated with oil sands investments and operations. The same analysis suggests that the United States will enjoy twice the benefits that Canadians outside of Alberta will see.
The equalization system and labour mobility add some complexity to the question of the geographical distribution of oil sands benefits. But with governments in B.C., and now in Ontario and Quebec as well, raising questions about the risks and rewards of potential oil sands pipelines crossing their jurisdictions, the concentration of oil sands benefits in Alberta is already a bit of a political football. If production grows as rapidly as the industry envisions, those tensions will almost certainly become more acute.
Some of the same regional considerations come to the fore in discussions of the impact our strong loonie has on Canada’s manufacturers. While there is healthy debate about the causes and strength of the effect, it’s clear that our currency tracks commodity prices closely, creating one more hurdle for Canada’s manufacturing sector at a time when it’s already facing challenges.
Perhaps most significant of all, our report examined the risk to oil sands expansion plans – and the economic benefits expected to accompany that development – associated with tackling climate change. If the world takes action to avoid dangerous global warming, demand for fossil fuels will fall from today’s levels. For example, the International Energy Agency’s analysis shows that in a scenario where the world’s governments cut greenhouse gas emissions to limit global warming to 2°C (the threshold governments have deemed to be “dangerous” climate change) global demand for oil peaks in 2020.
If stronger climate policies and lower oil demand are the way of the future – and given the risks posed by global warming, we have to hope that they are – then going all-in on the oil sands becomes a risky bet for Canada.
To better manage these risks, our report recommended:
1) that governments adopt effective policies to limit greenhouse gas emissions which, in addition to their environmental benefits, would spur clean energy development in Canada, thus reducing the risks to our economy if the world’s demand for oil falls in the years ahead.
2) that governments save more of the wealth that our one-time resources generate and consider the full economic picture – costs as well as benefits – when making decisions about new oil sands projects.
We believe the goal that matters in resource development is optimizing long-term benefits for Albertans and Canadians, while managing that development in a manner that protects the environment. The simple conclusion of our analysis is the maximum pace of development in the oil sands is unlikely to correspond to that optimal benefit, nor does it represent the minimum level of risk.
Sarah Dobson is a resource economist with the Pembina Institute, a national non-partisan clean energy think-tank, and lead author of the report Booms, busts and bitumen: the economic implications of Canadian oil sands development.
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