STUDY NO. 192A SEPTEMBER 2020 ECONOMIC RECOVERY PATHWAYS FOR CANADA'S ENERGY INDUSTRY: PART 1 – COVID-19 IMPACTS

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Canadian Energy Research Institute

ECONOMIC RECOVERY PATHWAYS FOR CANADA’S ENERGY INDUSTRY: PART 1 – COVID-19 IMPACTS

iv Canadian Energy Research Institute

Economic Recovery Pathways for Canada’s Energy Industry: Part 1 – COVID-19 Impacts

Authors: Victor Gallardo, Eranda Bartholameuz, Nurul Hossain

Recommended Citation (Author-date style): Gallardo V. Bartholameuz E. Hossain N. 2020. “Economic Recovery Pathways for Canada’s Energy Industry: Part 1 – COVID-19 Impacts.” Study No. 192A. Calgary, AB: Canadian Energy Research Institute. https://ceri.ca/assets/files/Study 192A Full Report.pdf

Recommended Citation (Numbered style): V. Gallardo, E. Bartholameuz, N. Hossain. “Economic Recovery Pathways for Canada’s Energy Industry: Part 1 – COVID-19 Impacts.” Canadian Energy Research Institute, Calgary, AB, Study No. 192A, 2020. URL: https://ceri.ca/assets/files/Study 192A Full Report.pdf

Copyright © Canadian Energy Research Institute, 2020 Sections of this study may be reproduced in magazines and newspapers with acknowledgment to the Canadian Energy Research Institute

September 2020 Printed in Canada

Acknowledgements: The authors of this report would like to extend their thanks and sincere gratitude to all CERI staff involved in the production and editing of the material.

Responsibility for any errors, interpretations, or omissions lies solely with CERI.

ABOUT THE CANADIAN ENERGY RESEARCH INSTITUTE Founded in 1975, the Canadian Energy Research Institute (CERI) is an independent, registered charitable organization specializing in the analysis of energy economics and related environmental policy issues in the energy production, transportation, and consumption sectors. Our mission is to provide relevant, independent, and objective economic research of energy and environmental issues to benefit business, government, academia, and the public. For more information about CERI, visit www.ceri.ca.

CANADIAN ENERGY RESEARCH INSTITUTE 150, 3512 – 33 Street NW, Calgary, Alberta T2L 2A6 Email: [email protected] Phone: 403-282-1231

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Table of Contents

List of Figures ...... v Acronyms and Abbreviations ...... vii Executive Summary ...... ix Chapter 1: Background ...... 1 Coronavirus Disease 2019 ...... 1 Global Economic Impacts ...... 1 Chapter 2: Canadian Experience ...... 3 COVID-19 Statistics in Canada ...... 3 Canada Within the Global Context ...... 4 Macroeconomic Impacts ...... 5 Chapter 3: COVID-19 Impacts on the Canadian Energy Industry...... 9 Energy Industry in Canada ...... 9 Impacts on the Oil Sector ...... 10 Impacts on Natural Gas and Electricity ...... 13 Impacts on the Renewable Energy Sector ...... 16 Chapter 4: Relief Programs and Stimulus Packages ...... 17 Pandemic Relief Programs ...... 17 Relief Programs for the Energy Industry ...... 18 Chapter 5: Canadian Multi-regional Input-Output Model ...... 19 Input-Output Models ...... 19 Chapter 6: Discussion and Incoming COVID-19 Impact Studies ...... 21 Bibliography ...... 23 Appendix A: Provincial COVID-19 Relief Programs ...... 26 Appendix B: Mathematical Framework of Input-Output Models ...... 30 Introduction ...... 31 Generic Model ...... 31 Canadian Input-Output Model ...... 31 Canadian Multipliers Derived from CERI's MRIO ...... 32 Interprovincial Multipliers ...... 33 Methodology ...... 34 Assumptions and Limitation ...... 34

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List of Figures

Figure 2.1: COVID-19 Confirmed Cases in Canada (as of August 20, 2020) ...... 3 Figure 2.2: COVID-19 Confirmed Cases Per 100,000 Residents (as of August 20, 2020) ...... 4 Figure 2.3: Real GDP Growth Projection in Selected Countries, 2020 ...... 4 Figure 2.4: Year Over Year Change in the Harmonized Monthly Unemployment Rate (2019-2020) ...... 5 Figure 3.1: Seasonally Adjusted Imports and Exports of Energy Products (2018 - 2020)...... 9 Figure 3.2: WTI Monthly Average Price (1998-2020) ...... 11 Figure 3.3: WCS Monthly Average Price (2005-2020) ...... 11 Figure 3.4: Average Retail Prices for Gasoline in Canada (2005-2020) ...... 12 Figure 3.5: Canadian Crude Oil and Equivalent Production (2018-2020) ...... 13 Figure 3.6: Natural Gas Consumption by End-user in Canada (2000-2018) ...... 14 Figure 3.7: Electricity Consumption by End-user in Canada (2000-2018) ...... 15 Figure 3.8: Monthly Natural Gas Consumption by End-user – 2019 vs 2020 ...... 15 Figure 3.9: Monthly Electricity Generation in Canada – 2020 vs 2015-2019 Average ...... 16 Figure 5.1: Input-Output Model: Conceptual Overview ...... 20

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Acronyms and Abbreviations

AESO Alberta Electricity System Operator BCAP Business Credit Available Program CAD Canadian Dollar CEBA Canada Emergency Business Account CERI Canadian Energy Research Institute

COVID-19 Coronavirus Disease 2019 ERF Emissions Reduction Fund GDP Gross Domestic Product GHG Greenhouse Gas I/O Input-Output IMF International Monetary Fund LEEFF Large Employer Emergency Financing Facility LNG Liquified natural gas MRIO Multi-regional Input-Output (Model) NRCan Natural Resources Canada OECD Organization for Economic Cooperation and Development OPEC Organization of the Petroleum Exporting Countries QOQ Quarter over Quarter RRRF Regional Relief Recovery Fund SARS Severe Acute Respiratory Syndrome UNCTAD United Nations Conference on Trade and Development USD US Dollar WCS Western Canadian Select WHO World Health Organization WTI West Texas Intermediate WTO World Trade Organization YOY Year over Year

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Executive Summary

The Canadian Energy Research Institute is investigating how stimulus programs can affect the economic health of oil, natural gas, renewable energy and electricity supply and demand. This project is designed to provide decision-makers with economic impact information in these four sectors to better target how recovery options can address the broad economic contraction resulting from the COVID-19 pandemic. This report is part 1 of 4 in a series of analyses of recovery pathways. In Part 2, CERI will present the economic impacts for recovery of the Canadian oil and gas sector; Part 3 will present the economic impacts for recovery of the renewable energy sector, and in Part 4, economic impacts for recovery of the electricity sector.

Generally, the shock to economies in countries where the novel coronavirus has been identified has followed a similar trail. Social distancing and stay-at-home measures, combined with government mandates to shut down non-essential goods and services establishments, drove a significant decrease in consumer spending. This was followed by a plunge in demand for goods and services and an unprecedented decrease in internal labour market activities (Conference Board of Canada 2020). Those factors further exacerbated the challenges that economies were already facing. From a macro perspective, the closure of international borders put a halt to the flow of final goods and intermediate inputs, creating significant bottlenecks in global supply chains and interruptions to the ongoing manufacturing operations of local and multinational corporations.

Overall, final domestic demand in Canada fell 1.5% during the first quarter of 2020, with an estimated decline in real GDP of 2.6% over the same period. This was mostly driven by an estimated real GDP fall of 7.2% in March 2020 (Gellatly and McCormack 2020). Statistics Canada (2020) also indicates that the lower output in March was linked to the swift decline in tourism and travel services, retail, manufacturing, food and accommodation.

The energy sector, among other economic sectors, continues to feel the impact of the pandemic on energy demand, investment, and employment. Before COVID-19 began to spread in Canada, the Canadian oil and gas sector, in particular, had already been facing challenges due to lack of market access and regulatory uncertainty. Canada's oil sands had already been impacted by reduced investment due to the low-price environment before 2018. The growing supply of Western Canadian crude oil production had (and still has) limited access to existing and new demand centres downstream, deepening the discount between the West Texas Intermediate (WTI) reference price and Western Canadian crudes (CERI 2019b).

Commodity prices are of particular concern for countries where the production and exports of energy products are important drivers for economic growth and government revenues. There was a sharp decline in energy demand and energy-related trade, which triggered a drop in energy prices and demand. These factors continue to present challenges for the energy industry in Canada.

In response to the challenges that the novel coronavirus has introduced to the economy (global and local), governments around the world have presented various relief programs to minimize the impacts of the pandemic. The Canadian governments, federal and provincial, have followed suit.

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Some of the general key observations from the COVID-19 relief programs are:

• Most relief measures are aimed at the cash flow (liquidity) of businesses. • Provincial tax/levy reliefs are common for all provinces (3-6 months in general). They include corporate taxes, property taxes, GST/HST, etc. • Operating loans and loan guarantees are common for all business sectors. • Multiple non-monetary benefits exist (examples: loan guarantee, non-eviction guarantee).

These relief programs either intend to address some of the challenges faced by specific industries, or they aim to alleviate the challenges that are common to a broader set of industries and sectors.

CERI has recognized nine major federal government programs to be relevant for the energy industry:

• Three subsidy programs: Canada Emergency Wage Subsidy, Temporary Business Wage Subsidy, and Canada Emergency Commercial Rent Assistance. • Two payment deferral programs: Federal Income Tax Deferral and Deferral of Sales Tax Remittance, and Customs Duty Payments until June 2020. • Four loan, grant and credit programs: Canada Emergency Business Account (CEBA), Regional Relief Recovery Fund (RRRF), Business Credit Available Program (BCAP), and Orphan and Inactive Oil and Gas Wells Grant.

At the provincial level, local governments have announced a multitude of programs to support local business and further support the federal programs. CERI recognizes tax deferral programs to be the most significant for all provinces and all industries. The tax deferrals include Provincial Corporate Tax deferral and deferral of other provincial taxes. A list of provincial relief programs and stimulus packages that CERI believes can benefit their respective provincial energy industry and sectors can be found in Appendix A.

In the subsequent analyses within this series, CERI will assess the economic impacts that these relief programs could have on the Canadian and provincial economies. To that end, CERI is using a Canadian Multi-regional Input-Output (MRIO henceforth), model. The model and methodology for the MRIO are explained in Chapter 5.

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Chapter 1: Background

Coronavirus Disease 2019 The World Health Organization (WHO) describes the coronavirus disease 2019 (COVID-19) as an infectious disease caused by a newly discovered virus from the coronavirus family (WHO 2020). Previous to this novel coronavirus, there had been six previously identified coronaviruses that could infect people: 229E; NL63; OC43; HKU1; MERS-CoV; and SARS-CoV. The last two cause what is known as Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS), respectively. The novel coronavirus affecting humans has been named SARS-CoV-2 (CDC 2020).

COVID-19 was first diagnosed in Wuhan, China, in 2019, as cases of pneumonia of unknown etiology were detected across the province of Hubei. It has been determined that the outbreak has a zoonotic source, though it is now transmitted from human to human. The WHO declared this disease a pandemic on March 11, 2020 (IPAC 2020).

As of August 20, 2020, there were approximately 22.7 million cases around the world and approximately 794 thousand reported deaths related to the disease (i.e., COVID-19). The United States, Brazil and India had reported the highest number of cases (5.8 million, 3.7 million, and 3.3 million cases, respectively). Regarding confirmed deaths related to the disease, the United States, Brazil and Mexico had reported the highest number as of the time of this writing (JHU 2020). The Center for Systems Science and Engineering at Johns Hopkins University (JHU) has tracked the spread of the pandemic in 188 countries. There have been no therapeutic or prevention options successfully developed, though it is estimated there are more than 2,000 active clinical investigations for vaccines (MarketLine 2020).

Global Economic Impacts Generally, the shock to economies in countries where the novel coronavirus has been identified has followed a similar trail. Social distancing and stay-at-home measures, combined with government mandates to shut down non-essential goods and services establishments, drove a significant decrease in consumer spending. This was followed by a plunge in demand for goods and services and an unprecedented decrease in internal labour market activities (Conference Board of Canada 2020). Those factors further exacerbated the challenges that economies were already facing.

From a macro perspective, the closure of international borders put a halt to the flow of final goods and intermediate inputs, creating significant bottlenecks in global supply chains and interruptions to the ongoing manufacturing operations of local and multinational corporations. This was particularly magnified as China was the first epicentre of the virus.

It is estimated that China accounts for about one-third of the global trade, and the country's manufacturing activities feed many of the inputs needed for industries in other countries. The increase in unemployment rates experienced by many economies was caused in part by supply interruptions of inputs from China, as well as governments' stay-at-home mandates (Conference Board of Canada 2020).

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According to the United Nations Conference on Trade and Development (UNCTAD 2020), global foreign direct investment could fall by 40% this year. The World Trade Organization (WTO 2020) estimates that the closure of international borders could result in a drop of between 13% and 32% in world trade. Furthermore, there is consensus among credit rating agencies and other international economic organizations that the global economy is likely to fall into recession. The International Monetary Fund (IMF 2020) revised the April 2020 global growth forecast down by 1.9 percentage points; in the June 2020 World Economic Outlook Update, the IMF projects global growth to decline by 4.9%. China is the only economy that could grow this year with an expected 1.0% of real gross domestic product (GDP) growth. Among the industrialized economies, Italy, France and the United Kingdom could experience the largest contractions this year, with a decline between 10% and 13% of real GDP (MarketLine 2020; IMF 2020b).

In Part 1 of a four-part series on the Economic Recovery Pathways for Canada’s Energy Industry, the Canadian Energy Research Institute (CERI) discusses the ongoing adverse impacts of the COVID-19 pandemic on the Canadian energy industry, including crude oil, natural gas, electricity and renewable energy sectors. Part 1 also highlights various stimulus packages available and explains CERI's methodology for modelling the economic impacts of these relief measures on the energy industry.

In Part 2 of the series, CERI will present the economic impacts for recovery of the Canadian oil and gas sector; Part 3 will present the economic impacts for recovery of the renewable energy sector, and in Part 4 – economic impacts for recovery of the electricity sector.

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Chapter 2: Canadian Experience

COVID-19 Statistics in Canada As of August 20, 2020, Canada had a total of 123,873 confirmed cases and 9,054 reported deaths related to the virus, with Quebec and Ontario accounting for 50% and 33% of confirmed cases, and 63% and 31% of total deaths, respectively. Alberta and British Columbia sat behind Ontario and Quebec in terms of the number of confirmed cases and related deaths, together representing about 14% of the total confirmed cases. The number of reported cases in the rest of Canada have been negligible, accounting for about 3.2% (Government of Canada 2020). Figure 2.1 provides a snapshot of the total COVID-19 confirmed cases by province and territory. Figure 2.2 shows the total confirmed cases per 100,000 residents in each province.

Figure 2.1: COVID-19 Confirmed Cases in Canada (as of August 20, 2020)

Data source: Government of Canada (2020). Figure by CERI.

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Figure 2.2: COVID-19 Confirmed Cases Per 100,000 Residents (as of August 20, 2020)

Data source: Government of Canada (2020) & Statistics Canada (2020a). Figure by CERI.

Canada Within the Global Context The International Monetary Fund (IMF) projects that real GDP in Canada could decline 8.4% this year, which is similar to other large economies (Figure 2.3). There is consensus among international economic organizations that China may be the only large economy that could see positive real GDP growth this year.

Figure 2.3: Real GDP Growth Projection in Selected Countries, 2020

Data source: IMF (2020b). Figure by CERI.

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Similarly, OECD data shows that the pandemic has had similar impacts on unemployment in most countries. Figure 2.4 shows the year over year (YOY) change in the monthly unemployment rate for a sample of countries included in the OECD data, with the caveat that the definition of unemployment can vary from country to country. Thus, while France has been highly impacted by the pandemic and the real GDP is expected to contract significantly this year (Figure 2.3), the impact on the labour market activity appears to be negligible. China's data on unemployment is not available.

Figure 2.4: Year Over Year Change in the Harmonized Monthly Unemployment Rate (2019-2020)

Data source: OECD (2020). Figure by CERI. Macroeconomic Impacts Similar to other countries, federal and provincial governments in Canada urged people to practice social distancing. They imposed stay-at-home measures and restrictions on non-essential travel to flatten the curve (i.e. slowing down the spread) and avoid the risk of overloading provincial health care systems. Household spending dropped as people remained in isolation, and governments began to order the closure of non-essential goods and services establishments. The overall demand for goods and services in the economy decreased, and as businesses experienced weaker earnings, cost-cutting measures were put in place, and unemployment increased.

While the novel coronavirus had already been present in Canada during January and February, the first reports of COVID-19 related deaths came in March. During the second half of the month, household

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spending dropped by a record 2.3%, with the service industry accounting for two-thirds of the decrease (Gellatly and McCormack 2020).

In the same month, Canada experienced a significant decline in labour market activity, with about one million lost jobs. Like other nations, almost all of the losses first occurred in the service industry, with an even distribution between part-time and full-time work. Statistics Canada (2020) reports that the unemployment rate rose to 7.8% between February and March 2020, without counting those individuals who avoided looking for work presumably due to COVID-19 fears (had these individuals looked for work, the unemployment rate could have been 8.9%).

Data shows that during the first quarter of 2020, the value of total exports dropped 3% quarter on quarter (QOQ). Reduced access to other countries restricted the exports of motor vehicles and parts (6.9% QOQ decrease), aircraft and other transportation equipment (9.3% QOQ decrease), metal and non-metallic mineral products (7.3% QOQ decrease) and travel services (16.3% QOQ decrease). Import values also saw a contraction during the first quarter (2.8% QOQ decrease), with interruptions in the flow of electronics and electrical equipment (8.4% QOQ decrease), metal ores and non-metallic minerals (16.3% QOQ decrease), consumer products (4.4% QOQ decrease), industrial machinery and equipment (4.4% QOQ decrease), among other goods (Gellatly and McCormack 2020).

Overall, final domestic demand in Canada fell 1.5% during the first quarter of 2020, with an estimated decline in real GDP of 2.6% over the same period (QOQ). This was mostly driven by an estimated real GDP month over month fall of 7.5% in March 2020 (Gellatly and McCormack 2020). Statistics Canada (2020) also indicates that the lower output in March was linked to the swift decline in tourism and travel services, retail, manufacturing, food and accommodation.

The weaker earnings in the goods and services industries triggered a natural response of cutting back on future capital spending projects. The grimmer economic outlook took a toll on investor confidence, and the global equity markets tumbled with fears of a potential recession. As the "wealth effect" set in (the link between consumer spending and equity markets1), the demand for goods and services contracted even further, causing a steeper decline in the labour market activities (Conference Board of Canada 2020). In April 2020, total job losses in Canada doubled to two million, with approximately 75% of the losses in full-time employment. The official unemployment rate for April was 13%, though the rate could have been 17.8% if those who did not look for work were included (Gellatly 2020).

Manufacturing operations came to a halt in Canada and the United States, caused by supply interruptions of inputs and stay-at-home orders. As a result, merchandise trade in Canada experienced a steep decline in April, with merchandise exports and imports falling by 30% and 25%, respectively. Preliminary estimates show that April's real GDP could see a decline of 11% month over month as compared to April 2019.

Some economic activities slowly began to reactivate in May, as provinces eased restrictions on non- essential goods and services establishments, as well as on social gatherings. During May, there was a slight

1 When the equity markets provide gains for investors’ portfolios, holders of these equities feel more comfortable spending money as they feel better about their economic prospects. It follows that investors cut back on personal spending when the equity markets are performing poorly.

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improvement in the labour market with a total increase of 290,000 jobs in Canada, with nearly 80% of these gains happening in Quebec. Activities in manufacturing, construction, wholesale and retail trade accounted for most of the gains. Economic restrictions remained in place in Ontario during May, making it the only province to experience further job losses, compared to the rest of the country (Gellatly and McCormack 2020).

Overall employment in Canada saw an improvement in May, with the official unemployment rate of 13.7%. However, more people who wanted to look for work did not actively search for a job compared to March and April. Statistics Canada (2020b) indicates that if these individuals were included in the official unemployment calculations, the unemployment rate in May would have been 19.6%.

COVID-19 has also had a significant impact on energy-related activities in Canada and around the world. There was a sharp decline in energy demand and energy-related trade, which, together with the initial Saudi-Russia confrontation, triggered a drop in energy prices and demand. These factors continue to present challenges for the energy industry in Canada. The following section touches on some of the challenges for the energy industry and the associated impacts resulting from the COVID-19 pandemic.

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Chapter 3: COVID-19 Impacts on the Canadian Energy Industry

Energy Industry in Canada Canada is the sixth-largest energy producer in the world, accounting for 4% of the total energy produced worldwide2. Natural Resources Canada (NRCan) reports that the energy industry directly contributes about 7.6% of the nominal GDP in Canada and indirectly contributes another 3% through construction and other energy-related goods and services. In particular, the oil and gas sector directly contributed 5.6% of the nominal GDP in 2018, whereas electricity directly contributed 1.6%. Furthermore, in 2018, the energy industry directly employed 282,000 people and indirectly supported 550,500 jobs. (NRCan 2020).

Regarding international trade, during 2018 and 2019, international merchandise trade data indicate that, on average, energy products accounted for about 19% of the total monthly merchandise exports and 6% of the total monthly merchandise imports. In contrast, during the second quarter of 2020, energy exports have accounted for less than 10% of the total monthly merchandise exports and about 3% of total monthly merchandise imports (Statistics Canada 2020d). Figure 3.1 shows seasonally adjusted energy imports and exports for 2018, 2019 and 2020.

Figure 3.1: Seasonally Adjusted Imports and Exports of Energy Products (2018 - 2020)

Data source: Statistics Canada (2020d). Figure by CERI.

2 Canada’s primary energy production includes crude oil (45%); natural gas (33.4%); hydro (6.6%); coal (6.2%); NGLs (3.7%); other renewables (3.5%) and nuclear (1.6%).

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Lastly, the Canadian energy industry, particularly oil and gas extraction, is capital intensive. Between 2016 and 2019, oil and gas extraction accounted for almost 15.5% of total capital and repair expenditures in Canada (about CAD$37 billion on average between 2016 and 2019), followed by the electricity sector3 accounting for about 9.5% (about CAD$23 billion on average between 2016 and 2019), and support services for oil and gas extraction, natural gas distribution and pipeline transportation together representing close to 5%. Collectively, these activities represent almost 30% of total capital and repair expenditures in the country (Statistics Canada 2019). Thus, shocks in the energy markets have direct and indirect impacts on the Canadian economy.

Impacts on the Oil Sector Before COVID-19 began to spread in Canada, the Canadian crude oil sector had already been facing challenges due to lack of market access and regulatory uncertainty. Canada's oil sands had already been impacted by reduced investment due to the low-price environment before 2018. The growing supply of Western Canadian crude oil production had (and still has) limited access to existing and new demand centres downstream, deepening the discount between the West Texas Intermediate (WTI) reference price and Western Canadian crudes (CERI 2019b). On the regulatory side, the legislation that reformed the Canadian Energy Regulator (formerly known as the National Energy Board), combined with the legislation banning tankers' shipping in the northern parts of British Columbia, increased the regulatory risk perceived by the sector (CERI 2019a).

Furthermore, there was an oversupply of oil to the market due to market share disputes among the Organization of the Petroleum Exporting Countries (OPEC) members, as well as between OPEC members and other oil-producing countries, particularly between Saudi Arabia and Russia. These production tensions had already put downward pressure on global prices before the pandemic (Conference Board of Canada 2020).

Conditions in global energy markets worsened as the novel coronavirus spread around the world. As mentioned above, stay-at-home measures, non-essential establishment closures and restrictions on non- essential travel triggered a contraction of the aggregated demand in most economies, and energy-related goods and services were not immune to these impacts.

Failed negotiations between Russia and OPEC in early March were followed by Saudi Arabia and Russia ramping up production and flooding the market with oil. Undoubtedly, the weaker global demand and the excess supply of oil resulted in lower crude oil prices and refined products. WTI closed 2019 at USD$59.88/barrel on average in December. By April of 2020, WTI's monthly average price was USD$16.55/barrel, the lowest monthly average price since 1999 (Figure 3.2).

3 North American industry classification system code 2211: Generation, transmissions and distribution.

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Figure 3.2: WTI Monthly Average Price (1998-2020)

Data source: EIA (2020). Figure by CERI. In Canada, Western Canada Select (WCS), the benchmark price received by many oil producers in Alberta, also experienced a sharp decline in April of 2020. Given that WCS trades at a discount to WTI, in April, WCS averaged USD$3.50/bbl for the month (Figure 3.3).

Figure 3.3: WCS Monthly Average Price (2005-2020)

Data source: Alberta Government (2020). Figure by CERI. Gasoline prices also dropped sharply in line with oil prices and reduced demand for refined petroleum products. Earlier in 2020, gasoline prices in the United States were around USD$2.6-$2.7/gallon (approximately CAD$0.9-$0.94/litre), and by the first week of April, prices were around the two-dollar

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mark (approximately CAD$0.7/litre) (Conference Board of Canada 2020). In Canada, the monthly average retail price for gasoline saw levels that had not been seen since 2008 (Figure 3.4).

Figure 3.4: Average Retail Prices for Gasoline in Canada (2005-2020)

Data source: Statistics Canada (2020c). Figure by CERI. Companies in the sector reacted quickly to the low and volatile prices by adjusting their capital spending. On average, firms reduced their 2020 capital spending by 30% compared to the 2019 level (Bank of Canada 2020). This is impacting new drilling, jobs in the sector, production growth and overall economic benefits to the rest of the economy (Province et al. 2020). While some early shut-in production, due to weaker demand, is coming back, it is still uncertain how much and how quickly it will come online. Figure 3.5 shows total Canadian monthly production for 2018, 2019 and 2020.

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Figure 3.5: Canadian Crude Oil and Equivalent Production (2018-2020)

Data source: Canadian Energy Regulator (2020). Figure by CERI. Notes: Values for 2020 are CER projected estimates.

Impacts on Natural Gas and Electricity Compared to the crude oil sector, the Canadian natural gas and electricity sectors are not subject to the geopolitical influence of large international organizations or cartels coordinating policies to secure favourable global market conditions for its members. Moreover, challenges that the liquified natural gas subsector has faced due to the lack of transportation makes this commodity less active in the global markets. Thus, the impact that COVID-19 has had on these two sectors is rather regional, as opposed to global.

The impacts on the global natural gas sector due to the pandemic are mostly felt through shocks in regional demand. The International Energy Agency (IEA) estimates that natural gas consumption could drop by twice the amount it did after the 2008 financial crisis. The IEA indicates that global demand was already weak due to the mild temperatures felt this past winter across the northern hemisphere. Though similar to the oil sector, measures and restrictions imposed by governments to curb the spread of the pandemic further decreased the demand for natural gas (IEA 2020b).

In terms of the electricity sector, while it is an integral part of the overall energy system, its non-storability feature makes this commodity more dependent on local demand and supply conditions as opposed to short-term macro-economic shocks. Thus, electricity cannot be priced globally, as the electricity networks are continuously balanced to match the local system demand with the least-cost supply mix4 (AESO 2020).

4 Some countries may not always use the least-cost mix.

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In addition, the degree of accessibility to primary energy resources to produce electricity and meet local demand further shields the local networks from global volatility. That is particularly true in Canada, where approximately 80% of the electricity produced comes from local emissions-free sources and, for the most part, the availability of these primary energy resources is immune to geopolitical conditions. The remainder comes from carbon-based generation, which Canada has abundant access to (CERI 2020).

Therefore, like natural gas, the impact on the electricity sector due to the pandemic is linked to shocks in local demand, which is mostly driven by residential, commercial and industrial users. Figure 3.6 shows the split amongst different types of natural gas users in Canada since 2000. Similarly, Figure 3.7 shows the split for electricity users over the same period.

Figure 3.6: Natural Gas Consumption by End-user in Canada (2000-2018)

Data source: Statistics Canada (2018). Figure by CERI.

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Figure 3.7: Electricity Consumption by End-user in Canada (2000-2018)

Data source: Statistics Canada (2018). Figure by CERI. For comparison purposes, Figure 3.8 depicts the difference in monthly natural gas consumption in Canada between 2019 and 2020 for each end-user. Monthly data on electricity consumption by end-user in Canada is not available. However, Figure 3.9 uses monthly electricity produced by electric utilities as a proxy for changes in monthly electricity demand during 2020 versus the 2015-2019 five-year average.

Figure 3.8: Monthly Natural Gas Consumption by End-user – 2019 vs 2020

Data source: Statistics Canada (2020d). Figure by CERI.

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Figure 3.9: Monthly Electricity Generation in Canada – 2020 vs 2015-2019 Average

Data source: Statistics Canada (2020c). Figure by CERI.

Overall, the impact on both these sectors in Canada (especially on the electricity sector) will be a function of the extent that the different types of users have modified their natural gas and electricity consumption patterns due to the pandemic in recent months.

Impacts on the Renewable Energy Sector Generally, the Canadian renewable energy sector comprises economic sectors that produce electricity, liquid, gaseous, and solid fuels using renewable energy sources, as well as energy storage systems that increase the value and reliability for renewable energy supply systems (Clean Energy Canada 2019). Industries that directly support renewable energy production, such as equipment, manufacturing, and construction, can also be associated with the renewable energy sector.

The impact on the renewable energy sector due to COVID-19 will be seen in the planning, construction, and operation stages of renewable energy projects (Kancharla 2020). The impacts at the operational stage, particularly for renewable electricity generation, would be relatively low as some of these projects operate under power purchase agreements. However, the impacts on the development of future projects will likely be high and notable.

Some of the key issues for the various stakeholders (developers, investors, contractors, subcontractors, and suppliers) are the inability to perform their contractual obligations; delays in project schedules, construction timelines and key deliverables; and failure to make timely payments, which changes the overall projects' risk profiles (Eggerman and Mehi 2020). Continued supply chain disruptions exacerbate these challenges; shortage of on-site labour; site access restrictions; unavailability of construction equipment, non-issuance of permits, etc. (Gowling WLG 2018)

These challenges will change how developers will conceptualize, plan, and develop renewable projects, and will lead to uncertainties in growth of the renewable energy sector in Canada.

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Chapter 4: Relief Programs and Stimulus Packages

Pandemic Relief Programs In response to economic challenges (global and local) resulting from the novel coronavirus, governments around the world have presented various relief programs to minimize the impacts of the pandemic. The Canadian governments, federal and provincial, have followed suit.

CERI has categorized the Canadian relief programs based on the type of funding availability. The four categories are as follows:

• Grants – Funds given by governments to support investment or operations, without a set amount of proponent contributions or without proponent contributions. These funds are not repayable. o Example: Orphan well cleanup funding for governments of Alberta, Saskatchewan, and British Columbia • Subsidies – Subsidy includes two separate categories: o Funds given by governments to support business operations, with a set amount of proponent contributions. These funds are not repayable. (Example: Canada Emergency Wage Subsidy). o A percentage of levies and taxes forgone by the government. (Example: 50% reduction of Oil and Gas Administrative Levy in Saskatchewan). • Payment Deferrals – A payment owed to the government or government agencies, where the payment deadline has been extended without penalties. o Example: Federal Income Tax payment deadline deferred to September 2020 • Loans and Credit Programs – Government-sponsored access to credit and loans through government institutions or financial institutions. These funds are repayable and may or may not have interest associated. o Example: Canada Emergency Business Account Some of the general key observations from the COVID-19 relief programs are:

• Most relief measures are aimed at the cash flow (liquidity) of businesses. • Provincial tax/levy reliefs are common for all provinces (3-6 months in general). They include corporate taxes, property taxes, GST/HST, etc. • Operating loans and loan guarantees are common for all business sectors. • Multiple non-monetary benefits exist (examples: loan guarantee, non-eviction guarantee).

These relief programs either intend to address some of the challenges faced by specific industries, or they aim to alleviate challenges that are common to a broader set of industries and sectors. The following section provides an overview of programs that are relevant to the Canadian energy industry.

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Relief Programs for the Energy Industry CERI has recognized nine major federal government programs to be relevant for the energy industry5:

• Three subsidy programs: Canada Emergency Wage Subsidy; Temporary Business Wage Subsidy; and Canada Emergency Commercial Rent Assistance. • Two payment deferral programs: Federal Income Tax Deferral and Deferral of Sales Tax Remittance; and Customs Duty Payments until June 2020. • Four loan, grants and credit programs: Canada Emergency Business Account (CEBA); Regional Relief Recovery Fund (RRRF); Business Credit Available Program (BCAP); and Orphan and Inactive Oil and Gas Wells Grant.

At the provincial level, local governments have announced a multitude of programs to support local business and further support the federal programs. CERI recognizes tax deferral programs to be the most significant for all provinces and all industries. The tax deferrals include Provincial Corporate Tax deferral and Deferral of other provincial taxes. A list of provincial relief programs and stimulus packages that CERI deems as significant support to their respective provincial energy industry and sectors can be found in Appendix A.

In the subsequent analyses within this series, CERI will assess the economic impacts that these relief programs could have on the Canadian and provincial economies. It will also assess the difference between the support programs can provide and the five-year average level of economic activity seen prior to the pandemic. To that end, CERI will use a Canadian Multi-regional Input-Output (MRIO henceforth) model that the institute developed and maintains. The model and methodology for the MRIO are briefly explained in the following Chapter.

5 While LEEFF is recognized as a relevant relief program to the energy industry, anecdotally, some industry participants have expressed concerns around the climate requirements linked to it. Moreover, the interest rates charged for the loan (between 5% and 10%, increasing by 2% annually) are less competitive compared to other options. This program had a low uptake at the time of the writing of this document. Also, at the time of writing, the details of the Emissions Reduction Fund (ERF) were still under development, and hence the program is not evaluated.

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Chapter 5: Canadian Multi-regional Input- Output Model

Input-Output Models Input-Output (I/O) models are used to estimate the impact that discrete changes in the economic activities within an industry or sector could have across the whole economy, given the interdependence that exists among industries. Notably, the use of outputs from one industry as inputs into another industry's production process. I/O models provide estimates on the impact of different economic variables due to the introduction of a set of expenditures or 'shocks.'

One of the main contributions of I/O models is the multipliers that are derived from the solution of these models. I/O model multipliers are estimates of the rate of change, or ripple effects, that a change in policy or the introduction of a set of expenditures could have on the overall economy (IMPLAN 2020). Notably, the impact that changes in demand for a specific industry has on other industries, measured in changes in GDP, tax revenues or employment. These multipliers reflect the level of entanglement among economic activities.

Three separate effects usually capture the ripple effects:

a) Direct effects – quantitative estimations that the policy or program (examples: increases in public spending, consumption, infrastructure investments, etc.) has on a targeted industry, in the form of an increase in the final demand—for example, the number of jobs created in the industry due to investment to increase production capacity. b) Indirect effects – increases in demand for intermediate goods and services triggered by an increase in an economic activity where a policy or program was initially introduced. For example, the number of jobs created in the industries peripheral to where an increase in investment was introduced. c) Induced effects – increases in consumer spending in the local economy by households or employees directly and indirectly linked to the economic activity where a policy of program takes place. For example, the number of jobs created in industries unrelated to the economic activity where an investment happened, but the investment fulfills other needs for consumers (examples: wholesale and retail, education or medical services, service industry, etc.).

While CERI will assess the direct and indirect effects, it will not include any value of the induced effects. The reasons for this are twofold. One, it is difficult to allocate induced effects to any one particular economic sector. Two, the assumption regarding increased spending is difficult to validate. For example, instead of spending, households could increase their savings. While that is a financial benefit to those households, its impact on economic activity is uncertain.

Figure 5.1 illustrates the general I/O model approach.

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Figure 5.1: Input-Output Model: Conceptual Overview

Source: Allee King Rosen and Fleming (AKRF 2013) For a detailed explanation of I/O models, including the full mathematical framework, assumptions and limitations, please see Appendix B.

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Chapter 6: Discussion and Incoming COVID- 19 Impact Studies

Due to globalization, the novel coronavirus has impacted, and will continue to impact, economies around the world. The final recount of the consequences is yet to be determined. Public health measures to control the spread, like social distancing and the closure of non-essential goods and services establishments, have forced household spending and income to fall.

Governments have responded with various stimulus packages and relief programs to alleviate the impacts of the pandemic. Given the interdependence that exists among industries, these relief programs can potentially provide relief to other industries through spillover effects.

In Part 1 of the four-part series, we have identified a series of relief programs launched by the federal and provincial governments that can have the most impact on the Canadian energy industry. With the use of a Canadian MRIO model, we will estimate the ripple effects through the economy due to the introduction of these stimulus packages.

Part 2 will analyze the impact on the Canadian economy (nation-wide and province-specific) if the oil and gas sector were to make use of the relief programs that are relevant for the sector (either sector-specific or industry-wide relief programs). The impacts derived for the oil and gas sector are analyzed together as the Supply and Use tables provided by Statistics Canada lumps upstream oil and gas together. Thus, the impacts cannot be disaggregated.

Part 3 will focus on the Canadian renewable energy sector and assess the impact on the economy if this sector makes use of some of these relief programs (industry-wide programs or sector-specific, if any).

Lastly, in Part 4, we will look at the Canadian electricity sector and estimate the ripple effects in the economy if this sector were to make use of the various stimulus packages.

In all cases, CERI will assess the current state of these sectors, the impact of government support programs and the resulting impact on Canada's economy. The analysis will also demonstrate the level of impact from the four energy sectors (oil, natural gas, renewable energy and electricity) associated with a given level of financial support.

September 2020 22 Canadian Energy Research Institute

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Government of Canada. 2020. "Coronavirus Disease (COVID-19): Outbreak Update." Outbreak Update. July 7, 2020. https://www.canada.ca/en/public-health/services/diseases/2019-novel- coronavirus-infection.html?topic=tilelink. Gowling WLG. 2018. "Guide to Doing Business in Canada: Oil & Gas." Gowling WLG. October 2, 2018. http://gowlingwlg.com/en/insights-resources/guides/2018/guide-to-doing-business-in-canada- oil-and-gas/. IEA. 2020a. "Sustainable Recovery - World Energy Outlook Special Report." ———. 2020b. "Gas 2020 – Analysis - IEA." Gas 2020. June 2020. https://www.iea.org/reports/gas-2020. IMF. 2020a. "A Crisis Like No Other, An Uncertain Recovery." World Economic Outlook. June 2020. https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020. ———. 2020b. "World Economic Outlook Update, June 2020: A Crisis Like No Other, An Uncertain Recovery." World Economic Outlook. June 2020. https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020. IMPLAN. 2020. "Understanding Multipliers." Economic Impact Data. 2020. https://implanhelp.zendesk.com/hc/en-us/articles/115009505707-Understanding-Multipliers. IPAC. 2020. "Coronavirus (COVID-19)." Infection Prevention and Control Canada. July 13, 2020. https://ipac-canada.org/coronavirus-resources.php. JHU. 2020. "COVID-19 Dashboard by the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University (JHU)." Johns Hopkins University. July 13, 2020. https://gisanddata.maps.arcgis.com/apps/opsdashboard/index.html. Kancharla, Sagar. 2020. "Delivering Renewable Energy Projects during COVID-19." WSP. 2020. https://www.wsp.com/en-CA/insights/ca-delivering-renewable-energy-projects-during-covid- 19. MarketLine. 2020. "Coronavirus (COVID-19) Executive Briefing - June 30 2020." https://www.marketline.com/covid-19/. NRCan. 2020. "Energy and the Economy." Energy Facts. July 2020. https://www.nrcan.gc.ca/science- data/data-analysis/energy-data-analysis/energy-and-economy/20062. OECD. 2020. "Key Short-Term Economic Indicators: Monthly Unemployment Rate." World Economic Organization. OECD.Stat. 2020. https://stats.oecd.org/index.aspx?lang=en. Province, The, Opinion, Columnists, but industry keeps tight grip on spending Tumblr Pinterest Google Plus Reddit LinkedIn Email Share Varcoe: Oil taps coming back on, Tumblr, Pinterest, Google Plus, Reddit, LinkedIn, and Email. 2020. "Varcoe: Oil Taps Coming Back on, but Industry Keeps Tight Grip on Spending." July 8, 2020. https://calgaryherald.com/opinion/columnists/varcoe-taps- coming-back-on-but-oilpatch-keeps-tight-grip-on-spending. Statistics Canada. 2018a. "Supply and Demand of Primary and Secondary Energy in Terajoules, Annual (Table: 25-10-0029-01 (Formerly CANSIM 128-0016))." January 25, 2018. https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=2510002901. ———. 2018b. "Supply and Use Tables, Detail Level, Provincial and Territorial." March 13, 2018. https://www150.statcan.gc.ca/t1/tbl1/en/cv.action?pid=3610047801.

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———. 2019. "Table 34-10-0036-01. Capital and Repair Expenditures, Non-Residential Tangible Assets by Industry (X1,000,000)." Statistics Canada | Government of Canada. November 4, 2019. https://www150.statcan.gc.ca/t1/tbl1/en/cv.action?pid=3410003601. ———. 2020a. "Population Estimates, Quarterly." Government of Canada. Population Estimates. 2020. https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1710000901. ———. 2020b. "CANSIM Table 326-009: Monthly Average Retail Prices for Gasoline and Fuel Oil, by Geography." https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810000101. ———. 2020c. "Electric Power Generation, Monthly Generation by Type of Electricity." Federal Government. Electric Power Generation, Monthly Generation by Type of Electricity. August 2020. https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=2510001501. ———. 2020d. "International Merchandise Trade by Commodity, Monthly." International Merchandise Trade by Commodity, Monthly. August 2020. https://www150.statcan.gc.ca/t1/tbl1/en/cv.action?pid=1210012101. ———. 2020e. "Supply and Disposition of Natural Gas, Monthly." Federal Government. Supply and Disposition of Natural Gas, Monthly. August 2020. https://www150.statcan.gc.ca/t1/tbl1/en/cv.action?pid=2510005501. UNCTAD. 2020. "Coronavirus Could Cut Global Investment by 40%." March 26, 2020. https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2313. WHO. 2020. "Coronavirus." World Health Organization. July 13, 2020. https://www.who.int/health- topics/coronavirus. WTO. 2020. "Trade Set to Plunge as COVID-19 Pandemic Upends Global Economy." April 2020. https://www.wto.org/english/news_e/pres20_e/pr855_e.htm.

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Appendix A: Provincial COVID-19 Relief Programs

Program Description Sector Province Type Details Delayed No Carbon Tax increase until Delayed Carbon Tax Increase All BC increase further notice.

Tax Payment deferral: Provincial sales tax Tax Deferred to September 30, Carbon tax All BC Deferral 2020. Motor fuel tax Employer Health Tax

WorkSafeBC postpones the reporting and payment WorkSafeBC postpones deadlines to June 30, 2020, for Payment reporting and payment All BC employers who report and pay Deferral deadlines quarterly. Employers who report and pay annually may defer until March 2021. Access to funds of $200 million for eligible small- and medium- sized businesses and non-profit Relaunch Funding All AB Fund organizations. Availability of $5,000 to offset a portion of their relaunch costs. Workers' Compensation Board Large employers have their Tax (WCB) premium payment All AB 2020 WCB premium payments Deferral deferrals (large employer) deferred until 2021. Workers' Compensation Board Subsidy & (WCB) premium payment 50% of payment deferred until All AB Payment subsidy (small and medium 2021. Other 50% subsidized. Deferral employer) Alberta corporate income tax balances and instalment Tax expenditures with dues Corporate Income Tax deferral All AB Deferral between March 18, 2020, and August 31, 2020, deferred until August 31, 2020. Effective July 1, 2020, AB Corporate Income Tax Tax rate All AB corporate income tax rate was Reduction change reduced to 8%. Payments to small and medium- Saskatchewan Small Business All SK Fund sized enterprises directly Emergency Payment (SSBEP) affected by government public

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Program Description Sector Province Type Details health orders related to COVID- 19 based on 15 % of a business's monthly revenue, to a maximum of $5,000. Tax Provincial Sales Tax All SK Three-month relief Deferral Workers' Compensation Board Payment Payment deferral to June 30, All SK of Saskatchewan deferral Deferral 2020. Reduction of the industry Oil and Decrease in Reduction by 50% for the 2020 portion of the Oil and Gas SK Gas levy fiscal year. Administrative Levy Deferral of payment of industry Oil and Payment Payment deferral to October 1, portion of the Oil and Gas SK Gas Deferral 2020. Administrative Levy Help small businesses that are Manitoba Gap Protection not eligible for federal All MB Fund Program programs, with $6,000 in immediate provincial support. Tax Payment deferral: Tax RST until June 2020 RST All MB Deferral No interest in Property Taxes Education Property Tax No interest charges or penalties for Manitoba Hydro, Centre Interest No interest charges or Gas, Workers Compensation All MB Subsidy penalties. Board and Manitoba Public Insurance (MPI) Interest and Penalty Relief for Businesses Taxes: Employer Health Fuel Tax Gas Tax A relief period of five-month for Mining Tax Tax Ontario businesses that are All ON Insurance Premium Tax Deferral unable to file or remit select International Fuel Tax provincial taxes on time. Agreement Retail Sales Tax on Insurance Contracts and Benefit Plans WSIB owed premiums are Workplace Safety Expenses Payment All ON allowed to defer reporting and deferral Deferral payments until August 31, 2020. Revenue Québec offers the Tax remittance of tax balances or Provincial Tax deferrals All QC Deferral payment of tax balances owed to be done by September 1. GST/QST and customs duty Tax All QC Payment deferral to June 30. payments Deferral

September 2020 Economic Recovery Pathways for Canada’s Energy Industry: Part 1 – COVID-19 Impacts 29

Program Description Sector Province Type Details The Emergency Support Plan for Emergency Support Plan for SME Businesses offers Small and Medium-Sized Loan or emergency funding of a lesser Businesses and the Concerted All QC loan amount of $50,000, while the Temporary Action Program for guarantee emergency funding accessible Businesses (PACTE) under PACTE begins at $50,000. According to cases – the Government of New Brunswick Deferring interest and principal Payment All NB defers loan and interest payments on existing loans. deferral repayments for six months on existing provincial loans. Small business owners bunted NB Small Business Emergency by the COVID-19 pandemic can All NB Loan Working Capital Program apply for working capital loans of $100,000. Defer commercial tenants rents Commercial Lease Rent Deferral Payment for 3 months, spreading the All PEI Program deferral deferred rent amount over the rest of the lease term. Deferring payments for Tax Property Tax Relief Measures All PEI provincial property tax and fee deferral until December 31, 2020 Emergency working capital financing to support PEI's small Emergency Working Capital All PEI Loan business during this Financing unparalleled economic disruption to the business. The workplace has provided Payment deferral to August 31, employers with a workers' Payment All NL 2020, with zero-interest or compensation premium Deferral penalties. payment deferral Tax Deferrals: Gasoline Tax Tax Payment deferral to June 23, All NL Carbon Tax Deferral 2020. Tax on Insurance Premiums Oil and Tax Payment deferral to June 23, Mining and Mineral Rights Tax NL Gas Deferral 2020.

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Appendix B: Mathematical Framework of Input-Output Models

Introduction Generally, increases in production capacity within an economic activity have two phases: a) development of the capacity, referred to as the investment phase, and b) the operation of the new capacity, or improvements of existing capacity to produce outputs, referred to as the operation phase. These two phases will have an impact on the economy through purchases of goods and services, as well as labour market activities. However, the initial phase is characterized by short-term activities that lead to short- lived impacts. It follows that when the economic activity arrives in the second phase, the economic impacts tend to last longer. Given the duration of these activities, the investment and operation phases are evaluated independently.

Generic Model

Assume that the economy consists of n industries, and zij denotes the observed input flow from industry i to industry j. Let Xi show the total output of industry i, and Yi represents the total final demand for the output of industry i. Thus, the output of industry i is distributed between interindustry sales and sales to final demand in the following simplified way:

= + + , for all i. (1)

𝑖𝑖 𝑖𝑖1 𝑖𝑖𝑖𝑖 𝑖𝑖 The technical coefficient𝑋𝑋 is then𝑧𝑧 defined⋯ 𝑧𝑧 as 𝑌𝑌the dollar's worth of industry i's output needed to produce one dollar's worth of industry j's output:

= (2) 𝑧𝑧𝑖𝑖𝑖𝑖 𝑖𝑖𝑖𝑖 The technical coefficients,𝑎𝑎 ,𝑋𝑋 𝑗𝑗can be obtained from the Supply and Use tables6 by using the industry technology model. Substituting (2) into (1), and solving for X yields: 𝑎𝑎𝑖𝑖𝑖𝑖 = ( ) (3) −1 where = ( ) 𝑋𝑋= [ 𝐼𝐼 ]−×𝐴𝐴 is 𝑌𝑌referred to as the Leontief inverse matrix. −1 𝑖𝑖𝑖𝑖 𝑛𝑛 𝑛𝑛 Canadian𝐼𝐼𝐼𝐼𝐼𝐼 Input𝐼𝐼 − 𝐴𝐴 -Output𝑎𝑎 Model The Canadian input-output tables7 are composed of:

i) output table, defined in matrix format as = where industry j produces commodity I; ii) input table, defined in matrix format as = + ; and 𝑽𝑽 𝑣𝑣𝑖𝑖𝑖𝑖 𝑌𝑌 𝑊𝑊 𝑼𝑼 𝑼𝑼 6 The Supply table shows the supply of products from domestic production and imports while the Use table shows the utilization of products by domestic industries and final users, and the value added by industries. 7 The mathematical framework draws heavily from Ghanem (2010).

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iii) final demand tables defined in matrix format as = + where 𝒀𝒀 = , 𝑲𝑲= 𝑭𝑭 𝑭𝑭 𝒀𝒀 𝒀𝒀 𝒊𝒊𝒊𝒊 𝒊𝒊𝒊𝒊 𝑼𝑼 = 𝒖𝒖 , 𝒂𝒂𝒂𝒂𝒂𝒂 𝑼𝑼 = 𝒖𝒖 𝒀𝒀 𝒀𝒀 𝒊𝒊𝒊𝒊 𝒊𝒊𝒊𝒊 represents the amount by which commodity𝑭𝑭 𝒇𝒇 i is 𝒂𝒂𝒂𝒂𝒂𝒂consumed𝑭𝑭 by𝒇𝒇 industry j whereas shows the value- added component. Similarly, depicts the amount of commodity i purchased by 𝑌𝑌category j, and 𝑢𝑢𝑖𝑖𝑖𝑖 𝑢𝑢𝑖𝑖𝑖𝑖 shows total indirect taxes paid by category j. Under this setup, the total supply and demand for 𝑌𝑌a 𝑓𝑓𝑖𝑖𝑖𝑖 𝑓𝑓𝑖𝑖𝑖𝑖 commodity, i, valued at the basic prices is defined as:

= + + + + (4) 𝑤𝑤 𝐴𝐴 𝑗𝑗 𝑖𝑖𝑖𝑖 𝑖𝑖 𝑗𝑗 𝑖𝑖𝑖𝑖 𝑖𝑖 𝑗𝑗 𝑖𝑖𝑖𝑖 𝑖𝑖 𝑗𝑗 𝑖𝑖𝑖𝑖 𝑗𝑗 𝑖𝑖𝑖𝑖 𝑖𝑖 Where ∑ is𝑣𝑣 the− imports𝑚𝑚 − ∑ of𝑛𝑛 i, − 𝑠𝑠shows∑ the𝑢𝑢 inventories𝑐𝑐 ∑ 𝑘𝑘 withdrawn,∑ 𝑛𝑛 and𝑥𝑥 scrap metals are represented by . On the right-hand side, is the𝑤𝑤 total personal expenditure on i by both residents and non-residents in 𝑚𝑚𝑖𝑖 𝑛𝑛𝑖𝑖𝑖𝑖 both home and abroad, capital expenditure, inventory addition, and exports and re- 𝑠𝑠𝑖𝑖 𝑐𝑐𝑖𝑖 exports of commodity i. 𝐴𝐴 𝑘𝑘𝑖𝑖 𝑛𝑛𝑖𝑖𝑖𝑖 𝑥𝑥𝑖𝑖 𝑠𝑠ℎ𝑜𝑜𝑜𝑜𝑜𝑜 This setup, through the use of multipliers, provides the means to estimate the impacts of any exogenous shock on a wide range of variables, including the GDP, employment, tax revenues, imports, and many more.

Canadian Multipliers Derived from CERI's MRIO From the MRIO model, CERI derives four multipliers for Canada and all the provinces:

i) Tax revenue multipliers, which measure the effect on all levels of government revenue; ii) GDP multipliers, which show the change in the final demand of output; iii) Labour income multipliers which approximate the changes in wages and salaries; and iv) Employment multipliers, which represent the change in employment due to an increase in final demand.

The multipliers are derived from the Leontief inverse matrix and measure the interdependencies and inter-linkages among industries. The Canadian industry-by-industry inverse of equation (4) is:

= [ ( ) ] (5) −𝟏𝟏 𝑪𝑪 � Where D is the market share matrix,𝑰𝑰𝑰𝑰𝑰𝑰 and𝑰𝑰 −B 𝑫𝑫is 𝑰𝑰the− 𝝁𝝁�input− 𝜷𝜷 −coefficient𝜶𝜶� 𝑩𝑩 matrix defined as the ratio of intermediate inputs to total output by industry, and , , represents the share of imports, inventories, and scrap in total supply for domestic uses, respectively. 𝜇𝜇̂ 𝛽𝛽̂ 𝛼𝛼� The tax revenue multiplier by industry k can be written as

= , (6)

𝛾𝛾𝑘𝑘 ∑𝑗𝑗 𝐼𝐼𝐼𝐼𝐼𝐼𝑐𝑐 𝑗𝑗𝑗𝑗

September 2020 Economic Recovery Pathways for Canada’s Energy Industry: Part 1 – COVID-19 Impacts 33

GDP multipliers are obtained from the Leontief inverse by weighing the contribution of each industry by its GDP-to-output ratio as:

= ( , ( 𝑦𝑦∗)) (7) 𝑢𝑢𝑖𝑖𝑖𝑖 𝑘𝑘 𝑗𝑗 𝑐𝑐 𝑗𝑗𝑗𝑗 𝑖𝑖 where is the vector of the total𝛿𝛿 industry∑ 𝐼𝐼𝐼𝐼𝐼𝐼 output.∑ 𝑔𝑔𝑗𝑗

𝑗𝑗 Finally,𝑔𝑔 let, lj represents the number of jobs per industry j, then the employment multipliers by industry k can be written as

= , (8) 𝑙𝑙𝑗𝑗 𝑘𝑘 𝑗𝑗 𝑐𝑐 𝑗𝑗𝑗𝑗 Interprovincial Multipliers𝜃𝜃 ∑ 𝐼𝐼𝐼𝐼𝐼𝐼 𝑔𝑔𝑗𝑗 The interprovincial multiplier derivation is similar to the Canadian process except that it accounts for the additional role of interprovincial trade. This leads to a conceptual difference from the national model in the treatment of final expenditure. In this case, the industry-by-industry inverse of equation (5) becomes

= [ ( ) ] (9) −𝟏𝟏 𝑷𝑷 � where R is the provincial commodity𝑰𝑰𝑰𝑰𝑰𝑰 share matrix,𝐈𝐈 − 𝐃𝐃 𝐈𝐈 INV− 𝛍𝛍� matrix− 𝛃𝛃 − has𝛂𝛂� 𝐑𝐑𝐑𝐑 14×14 sub-matrices, each of dimension × , where n is the number of industries, R is the provincial commodity share matrix composed of 14×14 sub-matrices. 𝑛𝑛 𝑛𝑛 , , = (10) 1 1 1 14 𝐼𝐼𝐼𝐼𝐼𝐼 , ⋯ 𝐼𝐼𝐼𝐼𝐼𝐼 , 𝑷𝑷 In response to a one-unit increase𝑰𝑰𝑰𝑰𝑰𝑰 in output� ⋮ for a ⋱given industry,⋮ � its corresponding column in each 𝐼𝐼𝐼𝐼𝐼𝐼14 1 ⋯ 𝐼𝐼𝐼𝐼𝐼𝐼14 14 province P of INV provides an estimate of production by all industries in al provinces i. For each provinces

p, within provinces impacts are therefore found in the diagonal sub-matrices of .

𝑷𝑷 Under this setup, the vector of tax revenue multipliers for all industries in each province𝑰𝑰𝑰𝑰𝑰𝑰 p is

= ( , . . . + , ) for all p = 1,2,…,14 (11)

𝑝𝑝 𝑛𝑛 1 𝑝𝑝 14 𝑝𝑝 The vector𝛾𝛾 of GDP𝑖𝑖 𝐼𝐼𝐼𝐼𝐼𝐼 multipliers𝐼𝐼𝐼𝐼𝐼𝐼 is

= , + , . . . + , , for all p = 1,2,…,14 (12) 𝑔𝑔𝑔𝑔𝑔𝑔 𝑔𝑔𝑔𝑔𝑔𝑔 𝑔𝑔𝑔𝑔𝑔𝑔 𝛿𝛿𝑝𝑝 𝒐𝒐1 𝐼𝐼𝐼𝐼𝐼𝐼1 𝑝𝑝 𝒐𝒐2 𝐼𝐼𝐼𝐼𝐼𝐼2 𝑝𝑝 𝒐𝒐14 𝐼𝐼𝐼𝐼𝐼𝐼14 𝑝𝑝 Where is the industry-length row vector based on the = 𝑌𝑌 for each province 𝑔𝑔𝑔𝑔𝑔𝑔 𝑢𝑢𝑖𝑖𝑖𝑖𝑖𝑖 𝑝𝑝 𝑗𝑗𝑗𝑗 𝑗𝑗𝑗𝑗 p. 𝒐𝒐 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 ∑ � 𝑔𝑔𝑗𝑗𝑗𝑗 �

The employment multiplier is

= , , . . . + , , for all p = 1,2,…,14 (13) 𝐿𝐿 𝐿𝐿 𝐿𝐿 𝑝𝑝 1 1 𝑝𝑝+ 2 2 𝑝𝑝 14 14 𝑝𝑝 𝜃𝜃 𝒐𝒐 𝐼𝐼𝐼𝐼𝐼𝐼 𝒐𝒐 𝐼𝐼𝐼𝐼𝐼𝐼 𝒐𝒐 𝐼𝐼𝐼𝐼𝐼𝐼

September 2020 34 Canadian Energy Research Institute

Where is the industry-length row vector based on the = for each province p. 𝑗𝑗𝑗𝑗 𝐿𝐿 𝑙𝑙 𝑝𝑝 𝑗𝑗𝑗𝑗 Methodology𝒐𝒐 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 𝑔𝑔𝑗𝑗𝑗𝑗 To estimate the economic impact, it is necessary to determine the dollar value of the investment and the operation phases. As a first step, assumptions of the expenditure shares allow us to disaggregate the investment phase into direct purchases of goods and services to complete this stage. The dollar value of the expenditure items is the economic impacts on GDP, jobs and tax revenues of the investment phase.

Similarly, the second step is to forecast the total dollar value of the operational phase from economic activity. The total dollar amount is further disaggregated into purchases of goods and services, wages (labour), payments to the government, and operating surpluses. These allocations are the economic impacts associated with economic activity during the second phase.

The economic impacts associated with these two phases are estimated for the whole Canadian economy and include GDP growth, job creation and preservation, and various forms of government tax revenues. The impacts are also broken down to the provincial level, when and if the ripple effects of the economic activity reach different jurisdictions.

Assumptions and Limitation There are two main assumptions when using multipliers from the I/O model:

1) It is assumed that the economy is in equilibrium. 2) There is a linear relationship between inputs and outputs in the economy. i.e., the model ignores economies of scale. Thus, inputs are used in fixed proportions to produce various final products.

As to the limitations around using I/O models to estimate economic impacts, three limitations are common across all I/O models.

1) Static relationships

I/O multipliers are calculated based on the value relationship among industries' outputs. Thus, the relationship and stability of the multipliers could change when:

• The relative price of commodities changes. • There is technological change. • Productivity changes. • There are changes in goods proportion scope and capacity utilization.

The main implication is that I/O model estimates are primarily used over short-term time horizons. Given that the most recent Supply and Use tables (Statistics Canada 2018b), which are required to build the model, contains 2016 data, the economic impacts are based on the relationships prevailing in that year. Any structural changes that have happened since the collection of the data have been left out of the model, and the results could be either over- or under-estimated.

September 2020 Economic Recovery Pathways for Canada’s Energy Industry: Part 1 – COVID-19 Impacts 35

2) Long-term mobility of factors of production is ignored.

I/O models ignore resource constraints. Thus, when I/O models are used to estimate long-term impacts, the pressure on wages and prices created by an increase in economic activity in one industry, which eventually triggers the mobility of labour and capital (factors of production) among all other industries, is not captured.

3) Cannot incorporate market signals

I/O models cannot incorporate the feedback mechanisms among price changes, investment decisions and operational adjustments that are organic to any shifts in the economy. i.e., income and substitution effects are ignored.8

8 In general, when the price of a good changes relative to its substitutes, consumers will demand more of the cheaper good and demand less of the more expensive good.

September 2020