Look at the other side of the petrodollar coin

May 18, 2012

Ontario Premier Dalton McGuinty recently spoke publicly about the problems Canada’s oil-powered currency was causing for his province’s manufacturing industry. But his words were drowned out by pious outrage from petroleum advocates (led by Alberta’s politicking Premier Alison Redford). How dare he suggest that the bitumen boom could be anything but good news for all Canadians?

More recently, NDP leader Tom Mulcair was targeted with a similar firestorm — including by the Canada West Foundation’s Roger Gibbins. In media interviews last week, Mulcair made two obvious and empirically defensible statements: Canada’s currency has been driven upward by the oil boom, and that escalation entails significant regional and sectoral side effects. For this he was targeted as divisive and destructive, advocating (in Gibbins’ overheated language) economic “mayhem.”

The stridency of these attacks is disturbing. By cranking up the rhetoric instead of examining real arguments, it is these defenders of the bitumen boom who throw gasoline on regionalist fires — not McGuinty or Mulcair. The Conservative government already paints opponents of new bitumen pipelines as foreign-financed subversives. Now it seems that questioning the broader economic impacts of unlimited bitumen exports is equally seditious.

There is no doubting the statistical correlation between oil prices and the loonie. Econometric analysis indicates that since the turn of the century, oil prices explain 86 per cent of the dollar’s rise. The precise reasons for this correlation are unclear. It certainly is not due to a strong trade balance. In fact, Canada has experienced a deepening international payments deficit in recent years, because non-petroleum exports are falling faster than our energy exports surge (see graph). My own research suggests it is foreign takeovers of petroleum companies and reserves, not current production and export of the stuff, that is driving the loonie up.

It is equally clear that the Canadian dollar is overvalued, relative to both historical averages and economic fundamentals. According to the Organization for Economic Cooperation and Development, the current “fair value” for the Canadian dollar (based on purchasing power parity analysis) is about 81 cents U.S. Anything higher and Canadian-made products and services look disproportionately expensive (including manufacturing, services, tourism — and even Big Macs, according to the Economist’s famous hamburger index).

At par with the greenback, our loonie is overvalued by 25 per cent — making everything we produce look artificially expensive in the eyes of foreign customers. Many other countries in the world recognize the dangers of overvaluation and act concretely to ameliorate the risk — including Brazil, Norway, Japan, Switzerland, and China. Calling for a currency that fairly reflects Canada’s real economic costs and prices is not begging for a subsidy. Rather, it’s simply demanding a level playing field. And recognizing that speculators in oil futures and foreign exchange markets might not be the best arbiters of economic reality should hardly be shocking in light of the financial chaos we’ve all endured for the last five years.

In my books, the best way to short-circuit the damaging link between oil prices and the loonie would be to carefully regulate foreign takeovers of resource companies. That’s a worthwhile policy to consider for many reasons (not just for avoiding Dutch Disease). And this hardly implies bombing Alberta’s economy back to the stone age; if anything, a more careful and strategic approach to managing this non-renewable resource would allow Albertans, too, to capture more lasting benefits than the current what-me-worry strategy can ever deliver.

Methinks the bitumen boosters doth protest too much, with their loud attempt to suppress any debate over the potential downsides of Canada’s current energy strategy — which consists of scraping as much bitumen, as quickly as possible, and exporting it raw. Are there important national spinoff benefits generated by the petroleum boom in Alberta? Absolutely. But are there also important costs and risks associated with this economic strategy based on the unregulated extraction and export of a non-renewable resource? Certainly. Could we do a better job of managing those costs and risks? Undoubtedly … unless we continue pretending they don’t exist.

Sensible policy analysis considers both the costs and the benefits of any policy choice. Where bitumen is concerned, however, even acknowledging that a coin has two sides is now denounced as unpatriotic and divisive. It’s time to end this energy McCarthyism, and have a genuine discussion about our future national energy strategy. Our goal should be to maximize the benefits, and minimize the costs, of this precious endowment of a non-renewable resource — and it’s not at all clear that the current Klondike-style approach is the best way to do that.

Jim Stanford is an economist with the Canadian Auto Workers and a Canadian Centre for  Policy Alternatives research associate. His report, A Cure for Dutch Disease: Active Sector Strategies for Canada’s Economy, is available at policyalternatives.ca

This op-ed was originally published in the Ottawa Citizen.