Don’t Kill the Goose That Lays the Golden Eggs – Oil and Gas Benefits All Canadians

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As real estate investors know, the root of a good market is tied to a successful economy and the existence of jobs. Economic output and jobs mean that people can buy and sell real estate. Not only do they have the means to afford a home purchase or pay rent, they can sell their homes and move elsewhere because there is someone who is willing to buy it. Consider the recession in many US cities and towns; wherein, people lost jobs, couldn’t sell their homes to move to a more economically viable area so sold at a huge loss or faced foreclosure.

 

Yes, the real estate market is VERY strong in most markets in Alberta and much of this is due to the oil and gas industry. The Oil and Gas industry benefits all Canadians; unfortunately not all Canadians (and politicians) realize that. While some Canadians would like to see Alberta’s oil industry shut down, little do they know that is equivalent to killing the goose that lays the golden eggs.

 

Alberta is the largest producer of conventional crude oil, synthetic crude and natural gas in Canada, which is the sixth largest oil-producing country in the world with one third of the world’s proven reserves. Overall, the energy sector has made substantial contributions to the country’s economy that benefits all Canadians. Unfortunately, naysayers continue to disparage the gains made by the industry. They, in effect, want to deny the entire country the golden benefits provided by oil and gas.

 

Industry contribution to GDP
One way to measure these benefits is to look at the country’s Gross Domestic Product or GDP, which is the total market value of all finished goods and services in a given year. In 2006, Canada’s GDP was $1.3 trillion. Of that amount, the oil and gas service sector contributed $65 billion while the products sector accounted for $87 billion. The two sectors of the oil industry contributed $152 billion to Canada’s GDP or close to 12 percent of the country’s total GDP. For the period 2010 to 2035, the industry’s contribution to total GDP is projected to reach $3.5 trillion.

 

Those are impressive figures but more importantly, the financial benefits are expected to add value all across Canada, with fifty-two percent of the service sector’s GDP contribution and 54 percent of employment figures originating from business ventures located all from coast to coast to coast.

 

The industry was expected to inject an additional $42 billion in 2010 and $44 billion in 2011 in capital investments, higher than all other industries. This can only result in further growth of the booming oil and gas sector.

 

Financial contribution
Every year, the federal, provincial and local governments receive billions of dollars in the form of taxes, royalties and other fees from the industry. The collections from this fund are crucial to government services such as education, health care and infrastructure that benefit all Canadians. In 2008, that amount was $26 billion. In 2006, the oil and gas sector alone remitted $9.1 billion, which represents over four percent of total taxes paid to the federal and provincial governments by different industries. That means the government can afford to hire more teachers and nurses, add more hospital beds, and build more roads. The industry itself employs almost half a million workers, directly and indirectly. These employees are sources of additional tax revenues for the government.

 

‘Dutch Disease’
Not everyone is happy with the achievements of the industry. Some political figures from eastern Canada, notably former Ontario premier Dalton McGuinty, complain that the energy sector is causing damage to the traditional manufacturing sector by pushing the dollar higher than the US currency. Mulcair calls it the “Dutch Disease,” a reference to the aftermath of the discovery of oil in the North Sea when the value of the Dutch guilder appreciated, making exports of the country more expensive in the international market.

 

Macdonald-Laurier Institute study
Robert Murphy and Brian Lee Crowley, co-authors of a study conducted by the independent Macdonald-Laurier Institute (MLI), disagree with this pessimistic view. Murphy is a senior economist for Energy Research in Washington while Crowley is managing director of MLI. Their conclusion is that “fears that oil and gas development creates winners in a few provinces at the expense of numerous losers in other regions is not borne out in the evidence. On the contrary, that evidence suggests that benefits are both substantial and surprisingly broadly distributed nationally.”

 

Examining different scenarios, the two observed that economic activity in Alberta and other energy-rich provinces of Canada stimulates demand for goods, including manufactured products from Ontario and Quebec. Even in the less attractive scenarios, there is a “shower of substantial benefits” to the entire country, according to the two co-authors.

 

25-year Projections
The study made the following projection for the years 2010 to 2035:

? Ontario will reap $ 64.9 billion in higher economic output and 882,000 person-years of additional employment, which can be attributed to Canada’s oil and gas development.
? British Columbia and Quebec’s GDP would grow by $28.8 billion and $14.1 billion respectively.
? If the Keystone XL and Enbridge pipelines are approved, the following are the expected economic output: Ontario–$95.3 billion; British Columbia –$42.4 billion; Quebec — $ 20.7 billion.

 

No ‘Dutch Treat’
As far as worries about the “Dutch Disease” are concerned, they explain that “while the so-called ‘Dutch Disease’ mechanism may operate, in practice it is … offset by the gains to the overall Canadian economy.” In all the scenarios studied by the authors, heightened economic activity in Alberta and other energy-rich parts of the country increases demand for goods, including manufactured products, from Ontario and Quebec.

The study concluded that, “It may be true that high worldwide commodity prices force foreigners to concentrate more of their purchases on Canadian petroleum exports rather than Canadian manufactured goods. But at the same time, these increased earnings in the Canadian petroleum sector allow for greater purchases of manufactured goods within Canada. In principle, these effects could be quite large showing that Canadians in general, and even the manufacturing sector in particular, are enriched by the presence of bountiful resource deposits.”

 

Equalization payments
Thanks mainly to earnings from the oil and gas industry, less wealthy Canadian provinces will be receiving additional funds from the federal government in the form of equalization payments. These payments are meant to equalize the provinces’ capacities to raise tax revenues. The following eastern provinces will get a grand total of $16.105 billion dollars for 2013-2014:

Quebec $ 7.833 billion
Ontario $ 3.169 billion
Manitoba $ 1.792 billion
New Brunswick $ 1.513 billion
Nova Scotia $ 1.458 billion
Prince Edward Island $ 340 million

Alberta, Saskatchewan, Newfoundland and Labrador and British Columbia will not receive any payments.

 

The Environment
An article on oil and gas would be remiss if it did not discuss the environmental impact of the Industry. The Canada West Foundation has come up with a discussion paper addressing this concern. “Look Before You Leap: Oil and Gas, the Western Canadian Economy and National Prosperity” rejects the notion that an economic downturn in one region will not be felt by the rest of the country. If the energy industry is weakened by a poorly-designed climate policy, the entire country’s economy will suffer. The paper does not downplay the negative effects of greenhouse emissions nor does it say that economic factors should take precedence over environmental concerns. The Foundation believes that the economy will be weakened if the oil and gas industry is unfairly targeted.

 

The challenge then is to come up with a plan that protects the environment without sacrificing the economic benefits provided by the energy sector. Some people believe that this is an impossible task. They argue that the green economy will fill in the gap that will be left behind by a weakened energy sector. They may or may not be right but coming up with an alternative to an essential segment of the national economy, such as oil and gas, will take a considerable amount of time.

 

For a sustained industry, we must do a better job of finding a balance between the environment, the economy and energy and I believe the good news is, we can do a better job. There can only be one conclusion from all these pieces of information. The goose that lays the golden eggs does not play favorites. Canada’s oil and gas sector benefits not just the oil-rich provinces but the entire country as well by providing funds for infrastructure improvements, healthcare and education. These improvements not only have the intended outcomes for people but aid in creating jobs and thus propelling the real estate market.

 

rightGreg Head is a bestselling author of Secrets of the Canadian Real Estate Cycle, a book he co-authored with Don R. Campbell and Christine Ruptash in 2011.

Over the last 12 years Greg has built a successful portfolio of residential properties. In his spare time, he enjoys educating real estate investors on the importance of investing strategically based on the real estate cycle.

Greg spent over 20 years in the oil & gas industry before retiring in early 2013 to become President of Virtually Possible, a company he co-founded to provide North American Realtors® with Online Marketing (www.vyralfactory.com) and Administrative (www.instant-workforce.com) services.

Greg has an Engineering Degree from the University of Manitoba and resides in Calgary, Alberta.

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