Canada is missing the bigger story about the oil sands

Stephen Gordon on driving away much-needed money and losing opportunities

by Stephen Gordon

(Jeff McIntosh/AP Photo/CP)

When we think about the economic importance of the oil sands, it is generally in terms of employment and GDP, but the “mining, quarrying and oil and gas extraction” sector—sector 21 according to the North American Industry Classification System (NAICS)—accounts for only 1.5 per cent of employment, 3.6 per cent of wages paid and only 4.4 per cent of GDP. And even these numbers overstate the importance of the oil sands, because they account for only part of NAICS sector 21. So at first glance, it’s hard to see why we spend so much time talking about it, let alone worrying about how Canada’s economy is becoming too dependent on the oil sands.

The answer is that this sector is enormously capital-intensive, with 16.5 per cent of Canada’s capital stock. On average, an employee in the mining, oil and gas sector is working with $1.4 million in equipment and structures; this capital-labour ratio is more than ten times that of the Canadian average. Installing new capacity and replacing depreciated capital in this sector accounts for 16 per cent of investment in real terms, and over 20 per cent in dollar terms. This wave if investment is not expected to slow anytime soon. According to this list, projects under construction are expected to add another 788,000 barrels per day in in production capacity—about 35 per cent of what is currently in place. It is this investment activity—not the actual production of oil—that is of immediate interest.

There are many implications, I’ll talk about two. The first is that foreign investment is very important. Investment spending must be financed by savings, and those savings can come from Canadians or from foreigners. Canadians investors already own 65 per cent of the assets in the oil and gas sector (this share is 47 per cent in the manufacturing sector) and are unlikely to significantly increase their holdings, if only to avoid putting all of their eggs in one basket. The Conservatives’ policy of favouring the development of the oil sands while simultaneously making life difficult for foreign investors, then, seems self-defeating.

The second implication is that we’re not taking full advantage of the opportunities generated by the surge in investment spending in the oil and gas sector. Right now, much—if not most—of the machinery and equipment supplied to Canada’s oil and gas sector comes from the United States. Unlike refining, supplying equipment and services to the oil and gas sector is a market that is growing rapidly, and one in which Canadian manufacturers can be expected to have certain built-in advantages.

The wave of investment won’t last forever, but it’s reasonable to think that it’s going to continue for several years yet: construction of an oil sands installation can take upwards of five years, and more projects are planned. Oil sands investment will continue to be a bigger economic story story than oil sands production for some time to come.

 




Browse

Canada is missing the bigger story about the oil sands

  1. In capital intensive industries, such as the oil sands, projects are very sensitive to local inflation (engineering and project management, materials supply, construction). When you have too many projects on the go at once, costs inflate. Why Suncor has been recently cutting back on its growth plans – deferring investment until better conditions exist.

    While sourcing of equipment may have been historically from the US, the trend has been to source steel and increasingly fabricated skids from places such as South Korea etc. Once the foreign supply chains are established, and some key suppliers get a foothold within Canada, this trend should continue.

    • Given that we currently source them from the US.. does this change mean anything of significance for us here? It doesn’t sound like our role will change at all anyway.

      • I haven’t seen the data myself, but I suspect a good portion of the numbers are from things like rotating equipment (compressors, pumps) heavy equipment (Caterpillar) valves, controls etc.

        I’m not sure what has happened with steel (pipelines, plate steel for vessel manufacturing) that was sourced out of Stelco (Hamilton) in the past. Maybe US Steel is now supplying from the US.

        I guess I’m a bit skeptical whether a booming oil sands industry will have a significant spillover effect in, say, Ontario manufacturing. Sure, some growth. But a high Can dollar also makes foreign suppliers other than the US competitive, perhaps at the further expense of Canadian.

        Somewhat related, Peter Tertzakian, economist and author with Arc Energy, had an interesting perspective on some of the local industry politics on the Petronas- Progress deal – some of it dealing with increasing foreign competition for finite projects. Access it through this tweet: https://twitter.com/globeinvestor/status/260795481758773248

        Obviously, how you view the Petronas or CNOOC deals may depend upon whether you are a small or medium sized producer looking to cash out short term, or whether you might be a larger one (such as Imperial) looking to continue investing for the long term.

  2. So…if most of the wealth is generated through capital investment, then the ideal scenario is that we tie foreign investment with purchasing of Canadian-made capital equipment at a discount (or dare I say subsidized) instead of giving breaks to them carte blanche…

    And what of the cost of clean-up (which never seems to get factored in)?

    Of course the sustainability of that industry is tied with the price of crude…as long as it is high enough and other sources scarce enough, then everybody is happier, I suppose…

  3. But Mulcair told us that the oil sands production was responsible for a too high Canadian Dollar and the decline of manufacturing in Ontario.
    Surely you are not saying that there is some benefit to infrastructure manufacturers and investors to the expansion of the oil sands.
    You better get ready for some slammin numbers and quotes from Waller and the gang to shoot that theory down.

    • Where is the manufactured good coming from? Not Ontario. A high dollar wrecks manufacturing because there is no way to offset the cost of shipping. That’s why they would rather up and move stateside.

  4. On the employment side, you are leaving out engineering and their support workers. The investment banking and lawyering that all that capital investment requires (Bay Street). You are leaving out all the related logistical support employment, in housing, in transportation, etc.

    Unlike the old oil industry, where one just dropped straws into the earth, the capital intensivity of the oil sands, and unconventional shale (and tight sand) oil and natural gas, provides a much bigger bang for the buck rippling throughout the entire economy, which makes Mulcair’s Dutch disease argument ludicrous.

    Dutch disease was a product of easy oil and natural gas, not difficult oil and natural gas, which requires much more capital, labour, and logistical support.

    • Depends how long the capital boom lasts. Stop building, things fall back to earth rather quickly. And I wouldn’t put a great deal of weight on production and hence capital investment forecasts more than a few years out. Things are in flux.

    • You are making the bold assumption that labour and capital equipment go hand in hand somehow…

  5. This article presupposes [ not overtly i'm sure] that a continued exponential expansion of the oil sands is a good thing, along with all those investor dollars. Of course in purely economic terms it is a good thing. Sadly for some we don’t live in a world where economic upsides are limitless or without cost. There is stuff like this out there:

    http://www.rollingstone.com/politics/news/global-warmings-terrifying-new-math-20120719

    Stuff we have to worry about whether we want to or not. Even discounting for reasonable error or bias those numbers are scary. Yet we continue to have no real workable consensus on how to transition away from what may await our children/grand kids.
    Frankly i’m pissed that all the smart people in the room just appear to be so god damned obtuse and short sighted so much of the time.
    Edit:Obtuse for dumb…calmed down now.

    • The oil sands are NOT growing exponentially. Linearly is more like it. And with the lack of pipeline infrastructure, the slope of that line will begin to decrease.

      Obama’s thermal coal exports to Asia and Europe are growing much faster than oilsands production. There is your carbon bomb.

      • There are carbon bombs in that article that go well beyond potential coal usage. But that would be a good start. The problem is it isn’t evenly distributed either, so there will be huge pressure for some countries to keep on using it – Poland for instance.
        A global price on carbon is essential at some point.

      • −”The oil sands are NOT growing exponentially. Linearly is more like it.”

        Tomato, tomatoe.

        If the price of oil should spike upward again, what then?

        • Do you have the foggiest idea what exponential growth looks like? Failed high school mathematics, I see.

          Oil sands growth is constrained by transport infrastructure. The price of oil could quintuple tomorrow, and it would have basically no effect on the basically linear growth of the oilsands, because the oil will not be produced if you can’t move it anywhere.

          The greatest beneficiary of the lack of pipeline capacity for oil sands oil is US blue state thermal coal.

          Environmentalists often fail to see the indirect consequences of some of their misguided ideas.

          • Well, you’re close about HS math anyway.

            Oil sands promoters like you should have listened more to people like Lougheed. If idiots like Oliver had, maybe, just maybe there would still be a chance of a pipeline to PR or possibly Vancouver.But they had to have Kitimat, didn’t they!They had to salt the earth before selling the project, didn’t they – dolts!
            If you’re right and transport infrastructure is the determinant – not just price – the oil lobby has no one to blame for being shut out of BC but themselves.

  6. Investing all our oil and gas subsidies in green energy instead would bring way more jobs, a healthier economy, and a better environment. WE are headed the wrong way. http://www.pembina.org/media-release/2392

Your email address will not be published. Required fields are marked *