Dutch Disease: extractive industries drive currency up, manufacturing declines.
Economics, Energy Policy

Is Canada Suffering from Dutch Disease?

Countries that frantically produce a single resource – like oil – often develop this known economic killer. We need to inoculate the economy with energy diversification before it’s too late.
BY Stu Campana on

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Everyone agrees that Canada has a lot of oil and that those oil resources are worth a lot of money. Yet, as a large, diverse and well-educated country, there’s no particular reason to build the Canadian economy on such a narrow foundation as oil. But, with oil sands exports growing quickly while other industries stagnate, this is the future we’re moving toward.

Everyone agrees that Canada has a lot of oil and that those oil resources are worth a lot of money. Yet, as a large, diverse and well-educated country, there’s no particular reason to build the Canadian economy on such a narrow foundation as oil. But, with oil sands exports growing quickly while other industries stagnate, this is the future we’re moving toward.

Stephen Harper has been very explicit in his vision of Canada as “an emerging energy superpower.” The “emerging” part really says it all for those who would like to see the oil sands phased out of use – there’s no intention within the Conservative Government to reduce oil sands production in any way. Harper’s drive to exploit what he clearly believes to be a golden goose has led him, in his frustration with the Obama administration over stalled pipelines, to threaten to sell it all to China instead. 

One way or another, it seems, Canada will pin its economic future on a 140,000-square-kilometre patch of sandy earth in Northern Alberta.

There are so many excellent environmental reasons why this is a very bad idea that it’s hard to even find the space to list them all,* much less to branch out into other anti-oil sands arguments. Nevertheless, we shouldn’t ignore the potential economic danger the oil sands pose to Canada.

There are abundant warning signs that the golden goose may be a vector for an economic killer by the name of Dutch Disease.

In 1959 a large reservoir of natural gas was found under Dutch soil near Groningen. Rapid exploitation ensued and by 1976 total revenue had topped $2 billion. Around the same time, observers noticed that the Dutch manufacturing sector had been in steady decline since the gas discovery, with a concurrent increase in unemployment.

Dutch Disease now refers to the negative economic effects of a resource boom and has been observed in oil and gas-rich countries around the world. The frantic production of a single resource drives up the national currency, thus reducing the international competitiveness of other domestic sectors, eventually crippling the economy. For years now, economists have debated whether Canada already exhibits symptoms of this ailment.

The Pembina Institute argues that at least a third of the Canadian manufacturing sector’s decline (nearly half a million jobs lost) is due to the rise of the so-called “Petro Dollar,” which refers to the Loonie’s propensity to closely track oil exportation.

Even if Canada’s case of Dutch Disease is currently a mild one, further intensification in the production of a single resource will surely push the country over the edge into an unmistakably full-blown illness.

It’s not hard to find examples from nature or other industries in which too much uniformity leads to trouble. Think of mono-crops or the feeling you get after eating eleven cookies for dinner. Given the money at stake, it’s not surprising that oil companies have also recognized the need to diversify portfolios. Producers such as Cenovus Energy have hedged their bets through nuclear fusion, just in case that dream becomes a reality. The federal government might consider investing oil money in green energy infrastructure, in order to pursue a similar strategy of preparing for multiple outcomes.

If the Canadian economy does not begin to diversify its energy production, expect to see more overt signs of burgeoning disease. A golden goose is a wonderful asset, but no matter how shiny, it’s hardly the foundation of a stable and robust economy.

* Ok, let’s list a couple, just for fun: climate change, groundwater contamination, rapid resource depletion and widespread environmental destruction over thousands of square kilometres.

Stu Campana is an international environmental consultant, with expertise in water, energy and waste management. He is the Water Team Leader with Ecology Ottawa, has a master’s in Environment and Resource Management and writes the A\J Renewable Energy blog. Follow him on Twitter: @StuCampana.