If government used a commonsense approach to growing GDP, would the oilpatch still be struggling?

The economic data for August 2017 indicates the Canadian economy contracted after several months of positive growth. Economists are quite shocked and baffled by it. However they should not have been because quite frankly, other than the recovery in the oil prices, the fundamentals were not strong enough to warrant a steady positive run. But then that’s a topic of separate discussion.

The crux of the matter is the Canadian economy needs a solid and steady supply of ‘oxygen’ to sustain a good run. Where could this oxygen come from? To understand this, one needs to understand the basics of Canadian GDP.

At a very high level, Canadian GDP can be summarized as follows:

• 30% Goods producing industries (which includes mining, quarrying, oil & gas, construction, manufacturing, utilities, agriculture, forestry)
• 70% Service producing industries

One must realize that the service producing industries are hugely dependent upon how strong and robust the 30% part of the Canadian economy is – owing to the multiplier effect (generated by the 30% part of GDP). Wholesale trade, retail trade, finance, insurance, real estate, professional, scientific, technical services, you name it, almost all facets connected with daily life get impetus from the multiplier effect of that 30% part.

Ways to stimulate the economy

It could be done through one or a combination of the following:

• Fiscal stimulus through central bank quantitative easing programs (QE)
  • Pros: Provides GDP growth and employment; Cons: Causes economic pains over long term
• Spending on infrastructure etc. through deficit financing (borrowings)
  • Pros: Provides GDP growth and employment; Cons: If not managed carefully, it can cause massive problems to the economy later
• Selling and/or mortgaging nation’s assets
  • Pros: May provide very short-term relief; Cons: Depletes national assets, not an advisable course of action
• Boosting the 30% of the economy by providing fiscal support to ‘manufacturing’, agriculture, forestry
  • Pros: Provides GDP growth and employment; Cons: Largely dependent on demand from foreign buyers, goes through ups and downs, susceptible to trade dispute issues
• Boosting the 30% of the economy by providing fiscal support to mining, oil & gas sectors
  • Pros: Provides GDP growth and employment; resources available within Canada; can provide support on a long-term basis; Cons: Has to go through complex review process; can potentially face opposition from activists and from various quarters
• Attracting investment from abroad and within the country to areas such as IT, the software industry and other sectors within the service industry
  • Pros: Can provide GDP growth and employment; Cons: Heavily dependent on the mercy of foreign investors; investing companies demand host of incentives

So, which is the best way?

Based on the above, if commonsense and rationality were the governing criteria, providing fiscal support to mining, oil sands & natural gas – resources that Canada is blessed with in abundance – should be receiving attention and support from the federal and provincial governments, and provided with all the support and conducive investment  needed to survive and thrive.

Current scene, and struggles of the oil and gas sector

Has the oil and gas sector been receiving the support it needs from the federal and provincial governments (barring few provinces, like, Saskatchewan, New Brunswick, Manitoba) in the recent years?

While other countries like the United States appear to be moving full steam ahead with the development of their oil and gas assets, the Canadian oil and gas industry over the last two and a half years has been finding itself entangled and stifled in a cobweb of new levies, taxes and procedural mazes at the federal and provincial levels.

If commonsense was the primary guiding force of current governance at federal and provincial levels in Canada (Saskatchewan, New Brunswick, Manitoba being exceptions) instead of zombie-like ideology holding sway, the oilsands and natural gas industry would have received positive support and encouragement rather than being thrust with situations during recent years that complicated and virtually ruined the investment climate surrounding this industry.

Nobody is suggesting that the oilsands and natural gas sector should be developed without addressing environment aspects. Environmental issues can be most adequately addressed in the design of new facilities, and pipelines. But folks at the federal and provincial level do not seem to comprehend and appreciate this. Reason? Again, because commonsense does not seem to be the primary guiding force of current governance!

Future outlook?

The LNG scene of Canada is currently looking dismal. The oilsands is somehow motivating itself to not lose hope despite the pariah like treatment it is being subjected to. Is there any hope then for a sustained supply source of ‘oxygen’ for the Canadian economy without having to sell out national interests and/or coughing up numerous incentives to foreign entities? There is no definitive answer to this at the moment.

Parth Mukherjee is a senior project management professional with more than 25 years of experience in the petrochemical, upstream oil and gas and pipeline industries in Canada and abroad. He also had a successful stint as television presenter, broadcaster and producer.