Canada is missing the bigger story about the oil sands - Macleans.ca

Canada is missing the bigger story about the oil sands

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

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(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.