Canada's oil sands boom is pitting two Goliaths of its economy against each other—the oil sands industry in Alberta and the country's manufacturing sector, based largely in the eastern provinces of Ontario and Quebec.
Since the early 2000s, manufacturers have shed more than 600,000 jobs, affecting industries ranging from auto parts to lumber. Many analysts say the timing is no coincidence. Production of tar sands crude began booming at that time—the wild growth in the sector sent the value of the Canadian dollar to all-time highs, making it tough for suddenly high-cost Canadian goods to compete in export markets.
This phenomenon has a name: Dutch disease. It was coined in a 1977 Economist article that detailed how the discovery, extraction and export of natural gas in The Netherlands drove up the value of its currency. The rise nearly wiped out the country's non-booming manufacturing sector.
Amid Canada's presumed outbreak of the affliction, however, there appears to be one bright spot: the fledgling clean energy economy. "I don't think we've seen any casualties as a result of Dutch disease in the clean energy manufacturing sector," said Keith Brooks, program manager for Blue Green Canada, an alliance of labor unions and environmental groups.
The reason is simple. So far, makers of solar panels and wind parts in Ontario—home to most of the country's renewable energy manufacturers and installations—haven't had to tap export markets to generate income. That's mainly because of a mandate requiring that at least 50 percent of components used in Ontario's renewables installations be made by Canadian suppliers.
Concerned that the rule might eventually lapse, however, local clean energy advocates are starting to ask whether clean energy manufacturers could compete abroad if domestic demand dropped off.
The answer is probably no, according to some of the economists and experts interviewed for this story. If the dollar keeps rising on the back of the oil sands boom, they said, it would harm the cleantech sector's chances in a market dominated by cheap products from countries like China.
With a strong currency, "it will not be easy for Canadian manufacturers to export clean energy products," said Serge Coulombe, an economics professor at the University of Ottawa.
Oil Sands and Dutch Disease
Alberta's first oil sands mine opened in 1967, but for decades output was insignificant because it was too expensive to exploit.
Compared with pumping conventional oil up from a well, tar sands production consumes a lot of energy, adding significantly to operating expenses. It requires extracting a mixture of sand, clay and bitumen—a relatively dirty grade of oil—from deep beneath Alberta's boreal forests. The bitumen must then be upgraded into a product that can be piped and refined.
The oil sands sparked interest of oil majors in the early 2000s, as oil prices increased and technologies improved, making it worthwhile to extract the bitumen. Today, tar sands crude accounts for about 70 percent of Canadian oil exports, the bulk of which is shipped to refineries in the U.S. Midwest.
The Alberta government expects oil sands production to more than double within the decade—but not without costs.
Environmental effects of oil sands production include the loss of forest and wetlands, waterway contamination and rising greenhouse gas emissions. One economic effect of the boom has been to push the Canadian dollar up against the U.S. dollar.
The Canadian dollar, worth just 62 cents ten years ago, is now about equal in value to the U.S. dollar—helping oil sands producers and the Alberta government, but harming Ontario and Quebec, where three-fourths of the nation's manufacturers are located. Companies that ship goods like car parts, lumber and wood pulp primarily to the United States saw their competitive edge slip as the Canadian dollar climbed, even before the recession curbed U.S. appetite for exports.
Manufacturers shed 322,000 jobs—one in seven positions—between 2004 and 2008, according to the federal agency Statistics Canada. Nearly all were in Ontario and Quebec. Ontario lost 198,600 jobs and Quebec lost 86,700 positions during that four-year period.
Analysts have attributed some of the job losses to other factors, such as the sluggish U.S. construction market and declining newspaper sales. At least 36 percent of all layoffs were due to Dutch disease, said Coulombe, the University of Ottawa economist. He based the figure on findings from a 2009 study he co-authored with economists at the Universities of Luxembourg and VU Amsterdam.
Last month, Robyn Allan, a prominent Canadian economist and former CEO of Insurance Corporation of British Columbia, affirmed the concerns raised by labor unions on the impact of oil sands production to manufacturers.
"The phenomenon of Dutch disease is real," she wrote in an analysis to the National Energy Board, a federal agency. The board is considering an application from Enbridge Inc. to build a $5.3 billion twin oil pipeline system. The controversial Northern Gateway pipeline would pump 525,000 barrels of Alberta oil sands a day to a new marine terminal in Kitimat, British Columbia, for export.