In the Shadow of the Boom How oilsands dEVEloPMEnT is rEsHaPing Canada’s EConoMy NathaN Lemphers • DaN WoyNiLLoWicz may 2012 In the Shadow of the Boom How oilsands development is reshaping Canada’s economy Nathan Lemphers and Dan Woynillowicz May 2012 In the Shadow of the Boom: How oilsands development is reshaping Canada’s economy Nathan Lemphers and Dan Woynillowicz May 2012 Communications management: Julia Kilpatrick Editor: Roberta Franchuk Contributors: Amy Taylor Cover design: Steven Cretney ©2012 The Pembina Foundation and The Pembina Institute All rights reserved. Permission is granted to reproduce all or part of this publication for non- commercial purposes, as long as you cite the source. Recommended citation: Lemphers, Nathan and Dan Woynillowicz. In the Shadow of the Boom: How oilsands development is reshaping Canada’s economy. The Pembina Institute, 2012. This report was prepared by the Pembina Institute for the Pembina Foundation for Environmental Research and Education. The Pembina Foundation is a national registered charitable organization that enters into agreements with environmental research and education experts, such as the Pembina Institute, to deliver on its work. ISBN 1-897390-33-5 The Pembina Institute Box 7558 Drayton Valley, Alberta Canada T7A 1S7 Phone: 780-542-6272 Email: [email protected] Additional copies of this publication may be downloaded from the websites of the Pembina Foundation (www.pembinafoundation.org) or the Pembina Institute (www.pembina.org). About the Pembina Institute The Pembina Institute is a national non-profit think tank that advances sustainable energy solutions through research, education, consulting and advocacy. It promotes environmental, social and economic sustainability in the public interest by developing practical solutions for communities, individuals, governments and businesses. The Pembina Institute provides policy research leadership and education on climate change, energy issues, green economics, energy efficiency and conservation, renewable energy, and environmental governance. Over the past 20 years the Pembina Institute has provided policy and technical solutions to address the issues of oilsands development, including participation in the regulatory review of oilsands projects, fee- for-service consulting for oilsands companies, policy research and analysis, and engagement in multistakeholder initiatives supporting oilsands policy, cumulative environmental impact management, and regional environmental monitoring. For more information about the Pembina Institute, visit www.pembina.org or contact [email protected]. The Pembina Institute 2 In the Shadow of the Boom About the Authors Nathan Lemphers is a senior policy analyst in the Pembina Institute's oilsands program. Since 2009, Nathan has examined the topics of oilsands economics and environmental management. In particular, Nathan's research has examined the liability management of oilsands mines, the economics of the proposed Northern Gateway Pipeline, the macroeconomic effects of oilsands development and the transboundary environmental impacts of the oilsands. Beyond his policy-related work with the Institute, Nathan has contributed to private and public consulting projects on such topics as offshore oil and gas drilling regulations, wetlands policy, sustainable design and sustainability reporting. Nathan is also a frequent media spokesperson for the Institute on oilsands related issues. Nathan holds a master's degree in city planning with a certificate in environmental planning and policy from the Massachusetts Institute of Technology. He also holds a bachelor of science in environmental and conservation sciences from the University of Alberta. Dan Woynillowicz is the director of strategy and communications with the Pembina Institute, and is passionate about energy policy and politics. Dan joined the Institute in 2001 as a policy analyst and led the Institute’s oilsands program from 2003 through 2007. He has authored or contributed to numerous reports on environmental, climate change and economic policy related to oilsands development, including the Institute’s groundbreaking 2005 report, Oilsands Fever: The environmental implications of Canada’s oilsands rush. In addition to managing the Institute’s strategy and communications team, Dan collaborates with diverse stakeholders to advance policy change, testifies before regulatory and legislative bodies and is a frequent media commentator on energy issues. He holds a master’s degree in environment and management from Royal Roads University, where he conducted research on corporate climate change strategy as a Social Science and Humanities Research Council scholar. He also holds a bachelor of science in environmental science from the University of Calgary. Acknowledgements The authors would like to thank the following Pembina Institute staff for their contributions to the research and review of this report: Devika Shah, Ed Whittingham, Jen Grant, Julia Kilpatrick, Katie Goplen, Lindsay Fischer, Marc Huot, Matt McCulloch, Randy Lucas, Roberta Franchuk, Simon Dyer, Steven Cretney and Taryn Mackenzie-Mohr. Also, many thanks to the following reviewers for their valuable insights and sage guidance: Amy Taylor, Phillip Colmar and three anonymous reviewers. Any errors contained in this report are the authors and do not reflect the views or endorsement of any of the reviewers. The Pembina Institute 3 In the Shadow of the Boom In the Shadow of the Boom How oilsands development is reshaping Canada’s economy Contents Executive summary .................................................................................................................... 7 1. Introduction........................................................................................................................ 13 2. Rise of the oilsands........................................................................................................... 17 2.1 Increasing oil prices and oilsands production ............................................................... 17 2.2 An economic windfall .................................................................................................... 19 2.2.1 Gross domestic product ........................................................................................ 19 2.2.2 Public revenue — royalties and taxes ................................................................... 21 2.2.3 Employment .......................................................................................................... 23 2.2.4 Economic growth models ...................................................................................... 23 3. In the shadow of the boom ............................................................................................... 26 3.1 The rise and risks of a petro-loonie............................................................................... 26 3.2 Oilsands fever: A Canadian strain of Dutch disease..................................................... 29 3.3 Clear winners and losers amidst a restructuring economy ........................................... 35 3.3.1 Divergent terms of trade........................................................................................ 36 3.3.2 Shifting dominance in exports ............................................................................... 37 3.3.3 Non-commodity exports struggling to compete ..................................................... 38 3.3.4 Impacts on labour.................................................................................................. 41 4. The economic implications of the oilsands boom.......................................................... 43 4.1 Provincial fault lines and the national fabric.................................................................. 43 4.1.1 Economic decline in the manufacturing heartland................................................. 44 4.1.2 Alberta reaps the lion’s share of oilsands’ benefits ............................................... 47 4.1.3 Regional differences in inflation ............................................................................ 49 4.1.4 Tax policies exacerbate regional imbalance ......................................................... 52 4.2 Oil price volatility and the revenue rollercoaster ........................................................... 53 4.2.1 The volatile nature of oil prices.............................................................................. 53 The Pembina Institute 4 In the Shadow of the Boom 4.2.2 Riding the public revenue rollercoaster ................................................................. 55 4.3 Canada’s carbon gamble and the 21st century energy economy.................................. 57 5. Conclusions and a path forward ...................................................................................... 62 5.1 Conclusions................................................................................................................... 62 5.2 A suggested path forward ............................................................................................. 63 List of Figures Figure 1. Average annual world oil prices, 2000–2035............................................................... 17 Figure 2. Alberta oilsands production, 1967–2010 ..................................................................... 18 Figure 3. Canadian crude oil production forecast, 2010–2025 ................................................... 19 Figure