If Canada forgets oil and gas, we must accept a lower standard of living

Jock Finlayson is the chief economist at the Independent Contractors and Businesses Association. David Williams is vice-president of policy at the Business Council of British Columbia.

It is hard to overstate the importance of energy to Canada’s trade balance. In its latest “scorecard” report, the Coalition for a Better Future observes that “over the past decade, Canada recorded a cumulative trade deficit of $130-billion. Had it not been for energy, our trade deficit would have been about $1-trillion.”

But one rarely hears federal government policy makers acknowledge that energy production and exports play a disproportionate role in “paying the bills” in Canada. In recent weeks we did some light research to see if Prime Minister Justin Trudeau or any of his ministers had ever talked up Canada’s global comparative advantage in energy (hydrocarbons) and were unable to find a single example.

Generally, Ottawa doesn’t like to talk about the industry – except in the context of reducing its emissions. Fair enough.

But Mr. Trudeau has gone further, ludicrously telling the German Chancellor and the Japanese Prime Minister – when they came asking for Canadian liquefied natural gas in 2022 and 2023 – that there is no business case for it (even though Ottawa greenlighted the LNG Canada project, as well as the Cedar LNG and Woodfibre projects in B.C.) The German and Japanese leaders went home puzzled.

Here’s why this is a problem.

Canada is a mid-sized economy that accounts for only 2 per cent of global GDP. Within North America, we represent less than one-tenth of the combined output of the three national economies.

To sustain our standard of living, Canada sells exports in international markets. Exports generate jobs and earnings that circulate through the non-export economy. They provide the means to pay for the vast array of imports that consumers want and need, from cars to clothing to high-end electronics. Companies also import essential parts and inputs for their operations.

The mix of goods and services that any market economy sells abroad ultimately reflects the activities where it has a “comparative advantage.” This principle boils down to a country being better off by “playing to its strengths” rather than trying to be a “jack of all trades.” Countries benefit the most from international trade when they specialize in exporting goods and services they can produce at a lower cost and/or higher quality relative to other countries. An analogy would be that a wonderful doctor is better off focusing on treating patients and buying (importing) their food from a skilled farmer rather than dividing her time between being a doctor and growing her own food.

Natural resource-based goods play an outsized role in our export portfolio. Added together, energy, non-metallic minerals and related products, metal ores, forest products and agri-food make up roughly half of all exports. Along with aerospace, these are the only broad categories where Canada posts trade surpluses.

In a world committed to fighting climate change, Canada must strive to be a responsible energy supplier and reduce the carbon content of the volumes we produce. But we must not forget that energy alone accounts for more than a quarter of merchandise exports. Over 2022-23, energy produced a trade surplus of almost $300-billion, a figure that far surpasses the combined surplus recorded across all other industries.

Within the broad energy basket, oil, oil-based products and natural gas dominate, providing about 80 per cent to 85 per cent of all energy-based export revenues. Energy’s contribution to Canada’s exports is poised to increase in the next few years. This is not owing to expanding exports of “clean tech” goods, carbon-free electricity or hydrogen – all frequently touted by federal government ministers. In fact, the environmental and clean technology sector is just 3 per cent of Canada’s economy and contributes only 2 per cent of total exports. Instead, the expected increase in Canada’s energy exports is attributable to the imminent start-up of liquefied natural gas production in British Columbia, along with rising volumes of Western Canadian oil shipments after the completion of pipeline expansion projects.

Yet we can’t think of another advanced economy where the national government is as discomfited with the country’s leading export sector. A better strategy would be to recognize that energy will remain Canada’s top export earner for decades to come – and to work collaboratively with the industry to reduce its carbon intensity over time.

Absent a more constructive policy approach, one that keeps sight of the sources of Canada’s demonstrated comparative advantages in international trade, the country must be prepared to accept a lower standard of living.

As published in The Globe and Mail on September 24, 2024.