Legend has it that a well-known saying originated in an American inquiry into a major transportation incident. As the story goes, a farmer was testifying about an accident he witnessed while out working in the fields. A head-on collision between two trains occurred right in front of him. In trying to get to the bottom of exactly what happened, the farmer was asked what his thoughts were immediately following the accident. He said, “Well, I thought that’s a hell of a way to run a railroad.”
There is no better way to sum up the way Canada is currently operating. We have taken several engines of our economic growth and are making such a mess of them that one can only say, “Well, that’s a hell of a way to run a country.” For a country blessed with untold resources that fuel a first-class living standard, we are inexplicably disinterested in getting proper value for them.
Does anyone wonder why OPEC exists? A group of countries realized they could maximize the value of their resources by acting in concert. The organization exports its products to almost every country in the world. OPEC’s mission is to provide a “a steady income to producers and a fair return on capital for those investing in the petroleum industry.”
Or take another major commodity exporter – Russia supplies gas to: India, Japan, South Korea, Taiwan, Latin America, and South America. It has pipelines to China and western Europe where it serves (in an unfriendly manner) Austria, Denmark, the Netherlands, Germany, France, the UK, Switzerland, Turkey and Finland. It provides natural gas to eastern European countries including Poland and the Ukraine, and periodically shows that KGB humour is still alive and well by shutting off supplies in the dead of winter.
The US, which for decades banned the export of crude oil, now is an exporter of both oil and natural gas. In particular, natural gas is piped into Canada and Mexico, and is exported via LNG terminals in ever increasing quantities to global markets.
This is a common theme – countries that produce more than they consume go to great lengths to make sure they can sell their products at market prices. Their economies depend upon it.
You know where this is all going of course. You can surely figure out which country has boxed itself in so that it has no markets for one of its most significant products, save one. The results are a disaster for Canada, and are most likely to get much worse.
Alberta and BC natural gas producers are being pounded by the lowest natural gas prices in 20 years. If that doesn’t elicit sympathy, consider the impact on the pocketbook of every Canadian citizen – low prices cut right into royalties, taxes, and spin off economic activity. Billions are being lost, for no good reason. There is no environmental benefit to blockading Canadian gas, there is no benefit of any kind. Only cost.
At the same time, stranded US natural gas now flows freely into Canada, flooding Ontario markets and further driving down prices. Ironically this does not even benefit consumers much; the overall gas bill does not fall much as prices do because of all the other charges piled on.
Canadians seem largely unperturbed, which is sadly a bit predictable. Canada has become two parts – one, the “hinterlands” that produce resources and are outward looking, and second, the urban centres that consume resources and are more inward looking (I once heard a Toronto radio-host semi-facetiously state that Canada’s borders end at the outskirts of Toronto).
Two pillars of our economy illustrate the point and a very big problem: extractive industries (petroleum and mining) and manufacturing. According to Statistics Canada, extractive industries contributed about $150 billion annually, and manufacturing approximately $180 billion (a gap that would close if Canada had access to international markets). Each contributes tens of thousands of jobs and plenty of tax revenue.
Here’s the thing though – major urban centres, which hold much of Canada’s population, are fiercely protective of manufacturing as a source of jobs and taxes. They need to be; certain key pillars of Canadian manufacturing exist only because of legislative or treaty protection. The auto industry is a perfect example. Southern Ontario benefits massively from the auto plants and parts manufacturers located there. All those businesses however could be virtually wiped out with the stroke of a pen. NAFTA is in danger, and Bombardier found out what the US thinks of government subsidies that aided development of its latest plane (as in a 300 percent tariff on the Bombardier C-Series jet). The US does not need Canada as a manufacturing base; Canada’s only value is an inefficient hedge against currency fluctuations. But the US does need jobs. The fact that it allows current trade flows to continue in existence does not mean it always will. If you doubt that, you apparently have forgotten who the president of the United States is, and that’s not possible. Canadian manufacturing is therefore the focus of much attention, hand wringing, and international diplomatic machinations. There is a lot at stake for central Canada’s economies.
Natural resources, on the other hand, are left out in the cold to fend for themselves with respect to market access. The reasoning seems to be that crazy money always flows into that sector. Who cares if it’s hurting now, all it takes is an increase in commodity prices and all those lunatic wildcatters and explorers come roaring back. Prices are always cyclical, so what’s the problem? And let’s face it, they’re way out in the bush anyway. How many votes are in Timmins or Fort McMurray or Chibougamau, compared to southern Ontario?
Well, here’s why we should all worry together as a nation. The reflexive inflows of capital to resource industries is no longer guaranteed. If we take for granted its eventual return we are playing with fire. What worked in the past won’t now, for a few very significant reasons.
First, increases in international commodity prices – namely energy, but others also – are becoming meaningless to Canadian producers since they can’t access those world markets. Natural gas prices in Alberta are at the lowest point since the 1990s, not because world prices are particularly terrible (they’re not) but because western Canada is forced to sell its product into an oversupplied market. Things are OK for now, with the momentum of past projects and investments still helping, but if the situation persists there will be a bloodbath. And capital won’t return without better market access.
Another reason capital may not return is the increasingly insane regulatory environment. The Energy East pipeline was killed because it was made responsible for greenhouse gases created by its output. It feels surreal to even type that; it seems so absurd as to be impossible. Do autos face the same hurdle? Does anything? Of course not. Then there was the Northern Gateway pipeline to the west coast; after years of regulatory finessing to meet whimsical, shifting demands, Canada’s own prime minister decided that oil tankers were a bad idea for the west coast. Thanks for letting Enbridge know, just in the nick of time. On the natural gas front, dozens of proposed LNG export terminals on Canada’s west coast have been unable to get off the ground despite enormous demand from nearby producers and ample opportunity to sell the product internationally (as the US is proving).
You need to care. All your Facebook friends need to care. All your pensioner friends need to care, as should friends in Ontario or family in New Brunswick or your kid in Vancouver. They all need to care that Canada gives away its resources at half of market value.
To the 10 million people in Canada’s urban centres, I implore you to pay attention: Capital may not return to extractive industries in any meaningful way, and your manufacturing lifeblood is at significant risk. Market access we can fix, US politics we can’t. One can be fixed without government expenditure. shouldn’t we do what we can to keep that one healthy? Hello? Anyone?
Read more insightful analysis from Terry Etam here. To reach Terry, click here