Last time, Michael Holden highlighted some of the information and key findings of the Canada West Foundation’s recently-released publication, State of the West: Energy – 2012 Western Canadian Energy Trends, focusing on energy trade and transportation in the region. This week, he continues his summary of those findings with a discussion of the economic impact of energy sector activity.
The energy sector makes a significant contribution to economic prosperity in western Canada. The entire range of energy-related activities—from initial exploration and feasibility analyses of new energy projects through to the sale and delivery of final energy products added $55.8 billion to the regional economy in 2010, equivalent to for 13.6% of total economic output in western Canada.
Most of that activity takes place in Alberta. At $40.1 billion in 2010, Alberta generates almost as much value from the energy sector as does the rest of Canada combined. Energy directly accounted for 22.6% of provincial gross domestic product (GDP) that year.
BC has the second-largest energy sector in the West, with total GDP of $7.8 billion in 2010, followed by Saskatchewan at $5.7 billion and Manitoba at $2.1 billion. However, in terms of its importance to provincial economic output, the energy sector in Saskatchewan ranks well above that of BC and Manitoba. In Saskatchewan, the energy sector made up 14.5% of provincial GDP in 2010. The corresponding figures for Manitoba and BC were considerably lower, at 5.3% and 5.1%, respectively.
Although the energy sector is not as labour intensive as many other industries, it is still a major employer in the West. Energy and mining directly employed an estimated 192,300 western Canadians in 2010, largely in jobs that are among the highest-paying in Canada. Average weekly earnings in energy-related industries exceed the national average by a considerable margin. In particular, oil and gas extraction pays the highest average wages of any industry in Canada, at $2,218 per week (including overtime) in 2010.
However, the true impact of the energy sector in the West runs far deeper. Its $55.8-billion contribution to western Canadian GDP in 2010 does not include the indirect and induced effects into other sectors in the region. Nor, for that matter, does it include the spillover effects into other provinces in central and Atlantic Canada.
Business and professional services, engineering and design, construction, manufacturing and a host of other industries also benefit from the presence of energy-related activities in western Canada. These effects are, unfortunately, not reflected in major economic indicators like employment and GDP. Other effects are missing as well. For example, the profits and wages generated by energy sector activity also feed back into the economy through increased retail sales of goods and services. While these impacts are concentrated in the West, they can be felt across the country.
Provincial governments in western Canada also benefit from the energy sector through tax revenues, as well as through resource royalties and Crown land sales and leases. These latter revenue sources in particular boost the fiscal capacities of provincial governments in the region, allowing them to provide higher levels of services at comparatively lower levels of direct taxation compared to many other provinces in Canada.
The wealth generated by the energy sector also benefits governments outside the region. The federal government collects far more revenue per capita from Alberta than from any other province—revenue that is used to finance spending across the country. This fiscal transfer is not the result of discriminatory tax policies against Alberta, but simply reflects the fact that wages, employment and corporate activity in Alberta are proportionately higher than anywhere else in Canada. Furthermore, the royalties generated from resource extraction in the West (which accrue only to the provincial governments), also benefit other provinces by raising their federally-funded equalization entitlements.
While the energy sector provides tremendous economic benefits to western Canada, the region’s energy wealth brings with it a number of risks and challenges as well. Perhaps the most important of these is the fact that the region is vulnerable to the boom-bust cycle associated with energy production, especially in the oil and gas sector. This issue is of particular concern in Alberta and Saskatchewan, which currently benefit the most from oil and gas activity.
Another challenge facing the region is the need to effectively communicate the extent to which western Canadian energy development benefits all of Canada. Recently, the opposite argument has been gaining traction. Various commentators and political leaders are suggesting that, by driving up the value of the Canadian dollar, oil production in the West is directly responsible for the loss of manufacturing jobs in central Canada. The implication is that the only cure for what ails Ontario is to ratchet down energy production in the West.
There is no doubt that a strong dollar (influenced by petroleum exports) is adding to the competitiveness and productivity challenges facing the manufacturing sector in Ontario. However, energy resources in the West create a wealth of opportunity, both within the region and across the country. Effective communication of how energy developments in western Canada benefit all Canadians could go a long way toward ensuring that Canadians view the West’s energy wealth as a national asset that provides national benefit.
– By Michael Holden