We are told on a daily basis that approval of new pipelines to export oil and gas are central to Canada's economic future. But sober economic analysis suggests that these claims are rather exaggerated.
A recent International Monetary Fund study of energy development in Canada finds that further expansion of investment and exports would indeed be, on balance, an economic plus. But the report also shows that the positive impacts of additional exports outside of the energy sector and the producing provinces are surprisingly modest.
The IMF notes that the oil and gas sector now supports 23% of private non housing investment in Canada and 26% of Canadian merchandise exports, up from 15% and 14% respectively in 2000.
They judge the overall economic impact of a growing primary energy sector to have been positive. However, they also note that there have been negative as well as positive impacts and that “higher energy prices contributed to the real appreciation of the Canadian dollar since the early 2000s which has intensified Canada's competitiveness challenges in non energy sectors, particularly in manufacturing.”
The direct impacts of higher oil and gas production on GDP growth over the past decade have been miniscule, adding just 0.1 percentage points to the overall annual growth rate, and creating just 1.7% of all new jobs.
But the IMF documents spillover effects on sectors like engineering, construction and finance which provide services to the energy sector (so-called backward linkages), and on sectors like refining which add value to primary energy products (so-called forward linkages.) At the same time, part of the boost to GDP is lost to imported inputs.
Overall, it is calculated that the oil and gas sector accounted for one third of cumulative GDP growth between 2007 and 2013.
The study then models the impacts of energy sector expansion moving forward, using a “no capacity restraint” scenario which sees production increasing significantly (by 20%) as new oil sands and LNG projects move to production and export capacity is increased.
Overall Canadian GDP would be 2% higher in ten years under this scenario, meaning that the annual growth rate would be boosted by less than 0.2% per year. The trade balance would, however, fall slightly due to appreciation of the Canadian dollar, and increased Canadian supply would lower North American energy prices.
Conversely, Canadian GDP would be just 0.5% lower in ten years in a “segmented market” scenario in which energy exports grow only very slowly due to significant capacity constraints.
The gap between the two scenarios is more modest than might have been thought. What is even more surprising is the weakness of the positive linkages to the Canadian economy of oil and gas development outside of the producing provinces.
The IMF estimate, based on 2009 input-output data, that a $1 increase in investment in the energy sector in Alberta boosts Canadian GDP by 89 cents.
Of the 89 cents boost to Canadian GDP, 82 cents will be in Alberta itself. The investment would boost Ontario's GDP by just 4 cents, the GDP of other provinces by 3 cents, and US GDP by 2 cents.
The linkages from the oil and gas sector to Canadian manufacturing are very weak “suggesting limited spillovers” as the IMF drily notes. A $1 increase in energy investment in Alberta is calculated to boost Canadian manufacturing GDP by just 3 cents, with most of the impact being in Alberta itself.
The IMF argues that “there appears to be an important scope to increase inter-industry linkages across Canada that would lead to wider sharing of benefits from the energy sector.” Domestic supply chains could be deepened so that manufacturing and service firms outside of Western Canada capture a larger share of the inputs purchased by the energy sector.
They also emphasize that there is significant potential for domestic as opposed to export pipelines to be built, so that oil from western Canada can displace imported oil used by refiners in eastern Canada. This would not only boost Canada's trade balance, it would also lower domestic energy prices and thus benefit the manufacturing sector and the wider economy.
While the IMF do not say so, the study suggests that there is much more to a sound energy policy for Canada than the issue of building pipelines for export. Deepening economic linkages within Canada is certainly key to wider sharing of the benefits of further energy development.
This article originally appeared in the Globe & Mail's Economy Lab.