The story behind Canada's oil addiction
Were we always destined to fall into the resource trap?
One of the thornier parts of ending fossil fuel production in Canada is not only the lobbying of industry leads or the vast amount of power that these companies wield over our politics. It’s also the fact that politicians have tied resource extraction to the country’s national identity.
That’s the question we’ll explore today: How did resource extraction – specifically oil and gas – become so tied to the national identity of Canada? Was it always this way? Was Canada destined to be an economy dependent on – and identified with – resource extraction due to their natural abundance? Or were those particular choices made along the way? In other words, could we have avoided our current economic dependence on extractive industries like oil and gas?
It’s true that resource extraction has been central to the Canadian economy since the earliest days of colonization. Canada is the world’s fifth-largest crude oil producer, the third-largest natural gas producer, and in the top ten coal mining countries. The extraction of natural resources, including metals, minerals, and agricultural and forestry products accounts for roughly 20 percent of our nominal GDP.
This has led to a situation in which politicians and even Canadians themselves see resource extraction as a core part of Canadian identity. The Conservative Party of Canada recently put out a dissenting paper pushing back against what they perceive as the government’s lack of support for the oil and gas industry. They write:
"For as long as people have lived in Canada, this land has been defined by its natural resources. From buffalo, animal furs, fish, and timber; to coal, oil, and natural gas; to lithium, uranium, copper, and gold, Canadians responsibly develop, process, and export natural resources. That’s why the anti-energy, anti-private sector alliance of the NDP, Liberals and Bloc are doing everything in their power to recklessly and prematurely shut down one of the key pillars of Canada’s natural resources development: the oil and gas sector."
These sentences are worth unpacking further. The claim they’re making is that Canada is not just a resource-heavy economy, but that the country is defined by its natural resources. Identity runs much deeper than policy alone; it’s not only a question of what we do, it’s a question of who we are. This sentiment is also not only espoused by the Conservatives; Prime Minister Justin Trudeau has been a loud proponent of this idea as well.
In the next sections, we’ll chart the story of how, although Canada’s economy started out as one based on resource extraction, it wasn’t destined to be this way; for a period of time we were actually headed in a different direction.
The Brief Rise – and Fall – of a Diversified Economy
Many countries with abundant natural resources fall into something called the Staples Bias. The term was coined by economic historian Harold Innis to refer to his theory about the profound impact natural resource (“staple”) production has on political and social development. Also called the “Dutch Disease” after similar trends that occurred in the Netherlands in the '70s and '80s, it theorizes that countries that discover abundant natural resources like oil will actually suffer economically overall as one industry’s rapid economic boom will come at the expense of other sectors of the economy.
This reliance on volatile commodity prices can’t sustain the country’s economy long-term, and if prices do fall, other sectors are too underdeveloped to pick up the slack. This phenomenon can also be seen at a global level. Researchers like Michael L. Ross have shown that oil-rich countries are on average less democratic, economically stable, and have more frequent intra-national conflict than countries without rich oil resources. It doesn’t create the kind of economic growth that it was promised to deliver.
This is exactly what Innis thought would happen to Canada. For a while, however, it seemed like Canada would prove his theory wrong. After the Second World War, Canada’s leaders were determined to avoid the Staples Bias. Policies aimed to help Canada “overcome its role as a ‘hewer of wood, drawer of water,’ and help us emerge as a full-fledged, diversified, industrialized economic power in our own right.”
They were largely successful. Canada’s economy diversified significantly throughout the latter part of the twentieth century. The aerospace industry, the telecommunications industry, the manufacturing industry, and many other value-added industries grew rapidly during these years. By the end of the 20th century, the majority of our exports came from these diverse, value-added industries and the country’s tech sector gained international reputability. Canada’s manufacturing sector consistently outperformed peer countries throughout the 1980s and '90s, and unprocessed natural resources accounted for less than half of our exports for the first time in history.
But in the 1990s, the government changed course rather dramatically, away from these sectors and back into natural resource extraction. This shift was mostly driven by the increased demand – and therefore, prices – for raw materials coming from countries such as China and India. The attempt to meet this demand led to the intense expansion of Alberta’s tar sands over the last twenty years to export more crude oil. The sector now makes up almost 7 percent of Canada’s GDP, making it dangerously close to being considered a petro-state, or a country where more than ten percent of GDP comes from oil.
This reallocation of capital and labour towards natural resource extraction has changed our once-diversified economy. Since 2002, more than 600,000 manufacturing jobs have been lost and the diversification gains made in the previous decades have largely been lost with them. The oil and gas sector’s expansion has not made up for this loss; only three percent of net jobs lost in the manufacturing sector have been recovered by those in oil and gas.
This has re-entrenched Canada’s dependence on raw material exports and made the country one of the worst performers in the OECD in terms of innovation, which now accounts for just 0.9 percent of GDP, a fraction of other countries such as Korea, Finland, the U.S. or China.
In short, we fell right back into the natural resource trap, when at one point it seemed that we might create enough economic diversification to escape it. All of this happened just twenty years ago.
This has been bad news economically for Canada. By 2011, two-thirds of our exports were once again made up of raw materials, while value-added exports were just a third (half of what they were in the 1990s). We’ve experienced stagnating incomes, a lack of jobs, and a slow comeback from recession. Our industries are experiencing declining productivity and our innovation has remained stagnant compared to our peer countries, even with high investment from the government in business research and development.
This might seem counterintuitive because industries like oil and gas are supposed to bring lots of money into the economy. They do, in the short term. However, investing so heavily in industries like oil actually leads to the Canadian dollar being effectively tied to the price of oil, which is bad news.
Let’s break that idea down further. Compared to the U.S. dollar, the OECD estimates that the “fair value” of the Canadian dollar is about 81 cents to the USD (in terms of purchasing power parity). In the 1990s, when our economy was more diversified, our currency traded well below this, making Canadian products attractive economically for international buyers. Because of the shift towards oil and gas, however, currency traders began to associate the dollar’s value with the price of oil.
This led the Canadian dollar to appreciate rapidly, reaching equal value to the U.S. dollar and hovering around it ever since. This might seem like good news, but it means that our products seem 25 percent too expensive over their “fair” value, making them less attractive to international buyers and damaging our chances of being competitive.
Clawing back from the resource trap
All in all, it’s hard to argue that this particular policy shift was a net positive for Canada. Although short-term gains are made through resource extraction, it’s not a sound economic policy for the long term; especially given the increasing pressures of climate change. Maybe back in the 1990s, the government could make these moves without too much backlash as the conversation about the climate crisis was less conspicuous (and the effects of climate change were felt less strongly).
But now, things are different. The climate crisis is here in full force, and with it come changes like extreme weather events, forest fires, and rapidly rising temperatures. Canada, like other countries, is being called upon to take swift action to reduce their emissions - something that will be nearly impossible without moving away from our reliance on oil and gas extraction.
Climate action is what people want. In a recent poll, researchers found that “more than 60 percent of Canadians want to see a cap placed on oil and gas emissions, a plan to stop taxpayer subsidies to oil and gas companies, “swift” implementation of a just transition policy, and investment in renewables.”
In order to justify the continued expansion of fossil fuels amidst clear public opposition and dubious economic benefits, the government has had to get creative. One tool is quietly slashing environmental protections, which happened in tandem with this re-embedding in the fossil fuel industry; other tactics include delegitimizing and criminalizing environmental movements.
But they also use subtler, more pernicious tactics, which tie the Canadian identity to resource extraction. In part two of this piece, we’ll dive deeper into how resource extraction has been used as a nation-building tool and why that’s such a problem for social change.
What all of this shows us so far, however, is that our current reliance on resource extraction is far from inevitable. The government chose to put its eggs squarely into the energy basket back in the 1990s, expanding fossil fuel production at the expense of the environment and the desires of the public. We were on a track to a more diversified, innovative economy – and our leaders reversed it. None of this is normal, natural, or inevitable. It’s the result of policy choices – choices we can make differently.
Stay tuned for part two.
Something we didn’t get to touch on today is the notion of “Ethical Oil” and how Canada is positioning itself as a more ethical choice to oil producers like Russia. Here’s an article which breaks down why the concept of “ethical oil” is a misnomer. Here’s a second one.
The Trans-Mountain Pipeline became operational this year, despite widespread Indigenous opposition. But could ongoing rights concerns still stop its operations? Read the story here.
This article breaks down the false promise of “economic reconciliation” with Indigenous peoples, and how many of these schemes are simply veiled plans to continue exploiting their territory.