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It would be interesting to look at some of those graphs disaggregated. For instance, if the gains have been concentrated in the top end of the income distribution then using provincial and national averages could miss part of the story. The reason that the narrative is successful is because a lot of people perceive there to be less "good" jobs in Ontario and Quebec. While no doubt there are winners in the ROC from oil sands production, Mulcair's argument would fall on deaf ears if there wasn't already a perception that a lot of people are hurt by the exchange rate appreciation (although you are correct to outline the advantage of terms of trade improvements).

That's why I made it a point to graph median real wages along with the averages.

Oops, that was silly of me. Nice post.

Excellent post. Many thanks.

Now Albertans should use your analysis to pose the following question to ROC: are you willing to give up the $X benefits you get from the oil sands in order to eliminate its harm to the environmental? Of course the answer for many of us would still be yes, but it would be interesting to model the answer for different values of X.


Interprovincial migration is also (presumably) always bad for the GDP of the provinces who lose population. Should we ban interprovincial migration? GDP is a bad measure of welfare. At a minimum we should switch to GDP per capita.

Your post appears to be little more than a variation of the broken windows fallacy.

Excellent post. But anyways, even if (as I see it) all benefits (such as real income) would occur in Alberta, would it be sufficient condition to ban it? I cannot see any moral grounds where one would deliberately sabotage raise in living standards of fellow countrymen just because they can. They are still Canadians, aren't they? And even if they would be of different nationality the case is still very weak.

At best these accusations can be interpreted as calls for higher taxation or more "solidarity" in between provinces. But I do not think that could be a something those any groups you mentioned at the end would aim for. It is just about creating negative PR that can be accumulated and then used up in some not related campaign.

I lived in Quebec and now I live in New York state. It is much easier to find hormone free milk in NY than Qc. The quality argument is BS to me. If Quebec or Canadian milk producers were competing on quality, there would much more brands around than we see. Instead we have all producer shipping there milk in the same tank. Try to find out where your milk came from exactly, how easy is that? What does that tell you about quality?

Stephen, please help me understand how I should think about the economic impact of the Oil Sands (or other non-renewable natural resources.) I'm forever wondering whether we economists are thinking correctly about this (and I have to visit my neo-con pro-logging pro-oil brother-in-law soon, so I want to get my thinking straight on this.)

My problem is that the economic debate is largely focused on the impact on GDP. But with a stock of non-renewable resources, GDP will be influenced by how quickly we choose to run those stocks down. I would have thought that we should care more about wealth; maximizing the present value of the rents we can generate from those resource.

I'm no resource economist (resource economics is one of my "known unknowns"), but I know there's a literature on the optimal extraction rates of natural resources. I also know that serious proposals have been made to overhaul our system of national accounts to better account for the depreciation of natural resource assets.

At the same time, when I try to think of how to put a price tag on our resource wealth, my mind boggles. I'll need a very-long-term discount rate; should that reflect the rate at which oil companies can borrow? or the federal government? or Alberta? I'll need very long-term price projections for the price of oil. Is it going up due to peak oil and Asian growth? or are we seeing a temporary bubble before the long-term elasticity of demand kicks in? I'm need projections of productivity growth in extraction business as well as guesses about total recoverable reserves. And to deal with the uncertainty in all these projections, I guess I'll need to take a stand on our degree of risk aversion.

I suspect that the problems in estimating the wealth associated with a natural resource has kept that approach from catching on. But I can't shake the feeling that focusing on GDP impacts is the wrong way to go.

What's your take on this?

I do NOT subscribe to any policies to manipulate the exchange rate. However, the magnitude of an exchange rate impact probably exceeds the value of any incremental demand from A;berta. let's look the relative size of the imports from Alberta and Ontario exports. International and interprovincial imports are roughly the same size for Alberta according to the interprovincial trade statistics (2008 is last year unfortunately). However, for ontario, the domestic supply to Alberta is roughly 1/10 of the size of Ontario's international exports. Exports are far more important to Ontario than sales to Alberta. To associate much resilience in Ontario employment with the incremental effects of the oil sands is a bit of a stretch.

@Simon - don't worry, the hard work is already done. The oil companies themselves already have a method for determining the present value of their in-ground reserves to put on their balance sheets. All we need to do to our public accounts is start thinking like a business does - the present value of future royalties should be recorded as an asset. Prove more reserves and you can increase that asset, extract oil and they decrease.

This way, we'll stop thinking about royalties as revenue. We can correctly recognise that collecting royalties is simply collecting on a debt that was already owed to the public purse. And then maybe Alberta will actually set a sustainable tax rate, instead of living off oil royalties like they'll be here forever.

The biggest problem in government accounting generally is that it focuses on cash flow instead of actual profitability.

Simon: Really well put. Amen!

Neil: "The oil companies themselves already have a method for determining the present value of their in-ground reserves to put on their balance sheets."

Yeah, but like Simon says, their discount rate is quite a lot higher than ours which means that they are vastly more incentivized to extract sooner rather than later.

What we should do is first decide on a schedule on which we want to consume our resources. *Then* contract for the cheapest bidder to do nothing more than extract it for us. There is no reason for private balance sheets to bear commodity price risk when the public is likely more able to bear long term price risk. In case of price collapse, we can always just leave it in the ground for the grand children.

Unfortunately politicians discount rates are even higher than the industry's, so the grand children are basically screwed.

Thanks for the info....I didn't know that....and it is clearly a step in the right direction. As K noted, we can argue about discount rates (and private benefits vs social costs)....but it helps us move away from an extraction-rate focus.

"Unfortunately politicians discount rates are even higher than the industry's, so the grand children are basically screwed."

Actually, I've heard some people use this as a argument for monarchy; since they should care about the state of the nation that they leave to your kids, they should get the discount rate right!

(It's the royal jubilee.....I couldn't resist.)

sorry....should have been "....leave to THEIR kids....."

I have a question. Sorry if it's stupid: is oil induced Dutch disease even plausible? FX is a big-ass market. We consume quite a lot of the oil we produce. The oil we export is traded in $US - much of which I assume firms leave in $US rather than converting to $CDN. Also, if I look here:


Eye-balling the numbers it seems to me that the run-up in the $CDN v. $US occurred between 2002 and 2007, and has since plateaued. Seems to me that it coincides with China's boom and developed world building bubble. People wanted raw materials and we have them. It wasn't just oil.

To my mind, the big mystery is why the $CDN has tayed high relative to the $US post-crisis/crash. What the heck is generating all that demand for $CDN? (Ghawar, I'm looking at you).

A note on some GDI implications over the longer term. From Statscan:

"Over the whole period between 1961 and 2008, the gap between Canadian and US GDI per capita declined. Higher energy prices raised Canadian income relative to American income in both the 1970s and after 2000. Incomes in Canada reached their highest relative level at 98% of American incomes in the early 1980s and have recently returned to levels over 90%. However, whether this increase is the result of an emerging trend or is just the result of a short-run commodity cycle depends on the future course of world commodity prices." [http://www.statcan.gc.ca/pub/11-010-x/2009012/part-partie3-eng.htm]

Now, the Conference Board of Cda [http://www.conferenceboard.ca/hcp/details/economy/income-per-capita.aspx#Falling_oil] had (2007) an interesting comparison of Canada and Norway v.a.v. their GDI's and the relative sizes of their resource sectors (Norway's is relatively larger than ours). How each country has managed its resource sector spells the difference in the results. Norway has a $300 bi sovereign fund; Alberta $15 billion. For the past three decades, in terms of improving its GDI, Conference Board rates Norway A,A,A, while Canada earns a B,C,C, for each consecutive decade. (But, heck, they also thought Ireland was a showcase for GDI improvement, at the time...)

And if we go to Statscan again [http://www.statcan.gc.ca/pub/75-202-x/2009000/analysis-analyses-eng.htm], for relative median income mobility, there is little difference between the 1993-1997 and 2005-2009 overall results. The real story is the relationship between the unemployment rate trend and the income trend over time, particularly, of course, for the 25-54 year-olds.

So, yes, I see the point of looking at GDI, at terms of trade, at cross-sector wage changes as a function of demand changes in one sector, etc. What is not clear to me -- I'm no expert -- is whether or not we are becoming more reliant on a resource-based economy, and if so, whether that's adequate, and if not, whether we really have any choice in the matter.

Don't discount the diplomatic benefits of the oil sands. Because US politicians of all stripes strongly endorse the goal of "North American energy independence", Uncle Sam won't do anything to hamper exploitation of Albertan oil (which is why that pipeline is going to be built regardless of Obama's personal wishes). The implications of this are that when the US eventually gets around to reducing its trade deficit (a 4% of GDP demand leakage year in, year out), its because of the oil sands that Canada will almost certainly be exempt from any trade barriers.

The right-wing spin is oil wealth is shared. Reality is that it is not. 40 percent of Ontario's tax revenues is still being siphoned out to fund programs. Why isn't Alberta paying more when it can afford it? Harper has arranged for Alberta to receive another $1 for healthcare transfer when Ontario is already underpaid in healthcare transfers.

Let's face it. Ontario is getting the short end of the stick.

There won't be a east vs west situation if oil wealth is truly shared. Since it is not, the other alternative is for Ontario to take a hiatus from the federation. Ontario has supported the country for decades; it is time for Ontario to clean house. That means, Ontario's tax revenues be used solely for the benefit of the province. Let the rich provinces do the heavy lifting for the country.

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