Alberta has all the economic leverage in any ‘Just Transition’ plan
Natural Resources Minister Jonathan Wilkinson’s plan to press ahead with “just transition” legislation is raising the ire of Albertan Premier Danielle Smith (Google: Alberta handshake) and stoked concerns in a province seized with the idea the governing Liberals are plotting a phase out of the oil and gas sector.
But 2022 trade data released this week suggest there may be no need to worry — Albertans have all the economic leverage.
The numbers show a banner year for energy exports.
Shipments of oil, natural gas, coal and refined petroleum surpassed $200 billion last year for the first time, blowing through records. The previous high was in 2021, when sales hit $129 billion.
As a share of total exports, fossil fuels made up 26 per cent of all shipments, also a record. The previous high was 24 per cent in 2014.
The surge in energy sales underscores the extent to which any transition away from fossil-fuel production will be prohibitively expensive, and not just for energy-rich Western provinces.
Which means that any efforts by Prime Minister Justin Trudeau to cut emissions from the oil and gas sector will lean heavily on technological improvements such as carbon capture, not on production cuts. Canada’s economy is just too reliant on the oil industry.
Top currency generator
There will be a temptation to dismiss the numbers as a price-driven phenomenon in a volatile sector. That the ups will inevitably be followed by downs, as they always are, and last year’s surge in receipts represent an inflated picture of the costs associated with scaling back the sector.
There’s truth to that — Albertans are still wearing scars from the 2014-2015 collapse in oil prices.
But even in the down times, fossil fuel energy represented a big chunk of our export receipts. In total, they accounted for 19 per cent of our shipments over the past 20 years. Canada is undeniably (and uncomfortably for many) an oil and gas economy.
No sector comes even remotely close as a foreign currency generator. Halving Canada’s oil and gas receipts would still leave the industry as our biggest export earner.
And there is nothing on the horizon poised to replace it.
In fact, outside of energy, Canada has been moving fewer goods abroad, not more. Exports in volume terms — when receipts are adjusted for price increases – are seven per cent below where they were in 2019. Oil sales measured in barrels, meanwhile, are rising.
Medium-term outlook for oil and gas production
So, what would curtailing oil and gas production mean for Canada’s medium-term outlook?
For Alberta, it would be more direct and immediate in terms of lost income and revenue. The federal government would also see revenue drop, since it taxes Albertan incomes and oil companies.
There would also be significant indirect costs that are difficult to quantify but would be incurred by every household and businesses across the nation. That’s because Canada relies on oil receipts to finance our imports, which have been growing quickly.
Outside of energy, for example, Canada ran a trade deficit of $139 billion last year, a big increase from $98 billion in 2021 and $71 billion a decade ago.
Without oil receipts (or replacement exports), Canadians would need to rely more on foreign borrowing to finance our spending — which wouldn’t be sustainable.
More likely, the Canadian dollar would weaken to rebalance our merchandise trade — effectively making imported goods more expensive to reduce demand. It’s no coincidence the Canadian dollar hit record lows in the late 1990s and early 2000s when oil prices were sagging.
A weaker currency also implies higher interest rates as rising prices for imports force the Bank of Canada to keep borrowing costs higher than what would otherwise be needed. The nation’s debtors and homeowners, in other words, also have skin in the game.
The federal government is in an unenviable position. There is no credible climate change plan for Canada that doesn’t include a significant contribution from the oil and gas sector. And the costs associated with rising temperatures are existential in nature — failure to transition to a net zero economy will ultimately be more costly in the long-term than any short-term burdens.
But you can’t shut down the country’s biggest export earning industry if you want Canadians to buy in. The government’s approval of the Bay du Nord project speaks volumes on this front.
Which is why Finance Minister Chrystia Freeland’s budget — with promises for money to help companies invest in new green technologies — will have more to say about the federal government’s thinking on climate policy than any plan to transition energy workers to more sustainable industries.