The Bitumen Cliff: Lessons and Challenges of Bitumen Mega-Developments for Canada’s Economy in an Age of Climate Change – by Tony Clarke, Jim Stanford, Diana Gibson and Brendan Haley

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The enormous bitumen developments taking place in northern Alberta today are collectively considered to be the largest industrial project on the planet. These projects will have dramatic impacts on the economy and the environment; they are also affecting the nature of the Canadian federation, and the structure of society itself. While the booming bitumen extraction and export industry supports important jobs and incomes, it is having a range of complex effects on other economic and social variables—both direct and indirect, intended and unintended. The full range of these effects has not
been adequately analyzed or debated by Canadians.

To help understand the broader economic consequences of the bitumen boom, this report applies the staples theory of resource extraction and export (as developed by Harold Innis and other Canadian writers). Viewed through a historical lens, the bitumen industry both reflects and reinforces Canada’s traditional role as a supplier of raw materials (fish, fur, wheat, timber, minerals, etc.) to more developed and powerful industrial centres (e.g. France, Britain, the U.S., and today China) in the global economy.

A risk of any staples development strategy is what Innis called the “staples trap.” Staplesbased economies must make enormous fixed-cost investments in production and transportation infrastructure, generally undertaken by large, often foreign-owned companies. To pay off these overhead costs and reward investors, staples industries face an enormous motivation to produce and export their staple faster.

This strategy is expensive, and potentially self-defeating: rapid export can drive down unit prices (a perverse trend already evident in the case of Canadian bitumen, with the costly “Canadian discount”), and revenues can also be threatened by technological or consumer changes which reduce demand for the staple in question (a longer-term threat which is also clearly relevant to the case of bitumen). As staples are exported in raw form to more industrialized trading partners, Canada is left to buy back processed, valueadded products and service at a much higher cost.

The combined outcome is a self-reinforcing staples trap, whereby the faster Canada exports its latest staple, the less diversified and capable the economy becomes—and hence all the more dependent on finding more staples to export. These economic, environmental, and geopolitical risks of staples-based development strategies must be weighed against the shorter-run economic gains that accompany major resource expansions.

This staples analysis helps us to understand the bitumen boom and its accompanying effects, both positive and negative, along several dimensions:

• In one of his first international statements, Canada’s Prime Minister declared Canada to be the “world’s next energy superpower,” with the bitumen industry as the centerpiece of this strategy. Surging commodity prices and unique trade rules (in particular nAFTA’s unprecedented “energy sharing” provisions) have reinforced the renewed dominance of staples exports in shaping Canada’s economic trajectory, and cemented Canada’s emerging structural role as North American energy storehouse.

The result has been a largely unplanned and unregulated boom in the extraction and export of raw bitumen.
All the classic features of a “staples economy” have become increasingly visible as this trend gathers momentum: including heavy investment in production and transportation infrastructure, growing reliance on foreign capital, disproportionate political influence of staples-producing corporations, and growing regional inequality.

• The growing bitumen industry has had dramatic effects on the international value of the Canadian dollar, and consequently on other tradable industries in Canada. Historically high global commodity prices have produced extraordinary profits for the petroleum industry and related companies. The consequent surge in the market value of Canadian petroleum and mining companies has attracted a corresponding surge of foreign investment: both portfolio flows and foreign direct investment (including a spate of resource-sector takeovers which has driven inward foreign direct investment to its largest share of Canada’s economy in decades).

These effects, reinforced by self-fulfilling expectations among currency traders (who believe that the loonie is now a “petro-currency”), contributed to a decade-long surge in the exchange rate, culminating in the substantial overvaluation of the Canadian dollar (which, at par with the U.S. dollar, is almost 25 percent higher than its fair value according to purchasing power comparisons).

This has negatively impacted Canada’s other export-oriented industries: both non-resource commodities (especially manufactures), but also tourism and tradable services (such as business services and transportation). Defenders of status quo policies have reacted with vitriol to the mere suggestion that the oil-fueled surge in the currency could possibly impose any downside whatsoever on other industries or other regions. But this vitriol cannot hide the overwhelming economic evidence that high oil prices and surging oil production are key factors behind the appreciation of the Canadian dollar, and that the high dollar in turn has been a key reason for the contraction of all other major tradeable industries in Canada (including, but not limited to, manufacturing).

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