Thomas Mulcair, the leader of the Official Opposition, has in recent weeks declared his belief that the oil industry has turned the Canadian dollar into a “petrocurrency”, increasing it’s value and making manufacturers in Ontario and Quebec. There are a number of reasons why Mr. Mulcair is completely incorrect and in my mind foolish.
1. Causes of Increase in CAD vs. USD / EUR
The increase in the Canadian dollar from USD 0.62 to parity is due to a number of factors:
- The fiscal discipline started by Chretien and Martin in the 1990s. Lowering Canada’s debt to GDP ratio made our bonds more attractive to investors when compared to countries that did not balance their books. Clinton did in the 1990s as well, which is why our dollar didn’t rise against the USD at that time. Presidents Bush and Obama have run up the US debt, thus making their debt less attractive. Surprisingly, the massive printing of money by the Federal Reserve has not yet devalued the US dollar, but it will have that effect and the CAD will continue to rise, perhaps dramatically.
- The expansion of the petroleum industry in BC, Alberta, Saskatchewan and Newfoundland
- The expansion of the mining industries in BC, Saskatchewan and Labrador.
2. Decline in Manufacturing
The decline in manufacturing employment in Ontario and Quebec is not solely due to the rise in the CAD:
- There has been a similar decline in manufacturing employment in adjacent US states, such as Michigan, Ohio and Indiana. If the decline in Canada was due to the currency, then employment in America should not have behaved the same way. In should have at least been unchanged to been driven upwards as they got relatively cheaper. But it didn’t. Manufacturing employment in North America has been declining for thirty years or more, due largely to significantly lower cost labour in Mexico, China and the rest of the developing world.
- The decline in manufacturing employment in the US is not indicative of a decline in manufacturing itself. Through automation and other efficiency increases, the US today produces twice the value of manufactured goods as it did in 1980 with one third the labour force. Canada has NOT had the same increase in productivity.
- Canadian manufacturers were artificially shielded from the need to be more efficient through the 1980s and 90s by a low currency. They remained competitive even as output per worker got much better in other places, including the United States. When the currency rose, these manufacturers were not in a good position to change their behaviour as a generation of leaders had been conditioned to be cautious and conservative. Retooling, re-engineering and modernizing are not conducive to that attitude.
- Shortage of young people who are willing to work hard. The demographics of the baby boomers mean that we have had fewer young people, and our society has made it less attractive to young people to do jobs that don’t involve sitting in front of a computer in an office. More young people should go into the trades, and more young people should be entrepreneurial. But government largesse, social attitudes demanding university education and cheap tuition have driven students away from taking risks or doing what are now perceived by some as “undesirable” jobs.
3. Why it is Foolish
Mulcair’s attitude is driven by his environmental agenda and his desire to attract voters in Ontario and Quebec over the those in the growing provinces where he has a low probability of winning significant seats anyway. This is foolish, given the coming boost in natural resource opportunities in the most populous provinces in the country. As the Mining industry starts pursuing major investments in open-pit metal mining in Nunavut, Northern Ontario and Northern Quebec (i.e. Plan Nord), is he going to deride those projects for their potential environmental impacts? Is he going to complain that those projects, which will be primarily for export and will have a similar currency effect as petroleum, are detrimental to the manufacturers in between Windsor and Quebec City? I highly doubt it. But it will look very stupid and make his case very difficult to be credible as these mining projects get moving.
Another reason it is foolish is that many firms in the region he is claiming to speak for are providing materiel to the oil industry. In fact, the manufacturers in Ontario supplying the oil sands employ more people than does the auto industry. I wonder if Mulcair would care to bail them out?
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Gerry from GTA
9 June 2012 at 13:36 (UTC -6) Link to this comment
Another factor in the decline in manufacturing is the movement of Ontario from North America’s cheapest electricity to one of the most expensive in North America.
This can be traced back to NDP leader Bob Rae who made an alliance with Liberal Premier Peterson to support their minority government by imposing a moratorium on nuclear power in the middle of the construction of Darlington Nuclear Power Plant.
This was insane for several reasons because there are many large ticket items that are very costly and under very tight schedules. To mothball a steam generator or pressure vessels for 2 years increases costs dramatically.
Another reason was that timing was heavily dependent on Darlington being up by a certain date so Bruce could be taken down for planned maintenance. Because Darlington was delayed, it was required to keep Bruce running till it needed to be shutdown for major repairs. The same was done with Pickering thus causing avoidable damage to the various reactors thus escalating the costs resulting in quadrupling the debt of Ontario Hydro.
Come in Dalton McGuinty who decides that 4 clean coal power plants was harmful to the world’s environment when China was bringing online a dirty coal power plant every week for years on end and decided to blow up some of Ontario power generation assets. What to replace it with except wind farms (aka bird whackers) and solar power and seriously subsidized alternate power generation.
In essence we went from the cheapest power in North America to the most expensive. That is why Ontario lost it’s manufacturing edge.
Also add in environment treaties & regulations that do not allow for the building of new coke plants thus allowing our steel industry to not be able to modernize and thus remain competitive in a global economy.
It is political interference in the economy that is to blame for the decline of manufacturing in Ontario, not the dollar.
Rob West
9 June 2012 at 16:00 (UTC -6) Link to this comment
just one small quibble, the fiscal disipline was acctually started by Mike Wilson. Most of the debt racked up under his watch was paying interest on Trudeau’s debt.
Taliesyn
9 June 2012 at 17:46 (UTC -6) Link to this comment
Wilson never actually reduced program spending. He slowed the rate of growth in program spending, but we were still borrowing to pay both programme and interest costs. The 1994 Martin budget was the first where programme spending actually fell on a year-over-year basis.
Gerry from GTA
9 June 2012 at 18:48 (UTC -6) Link to this comment
At that time of post Trudeau interest rates were exploding and approaching 22% if I remember correctly — debt payments were overwhelming normal government day to day expenditures.
Just remember it was Jean Chretien as finance minister that institutionalized the chronic deficit. Previous to that, governments ran in a reasonably balanced budget since WW2. If one year they ran over they compensated the next year. It was the Trudeau government that institutionalized perpetual deficit spending and made it an acceptable practice.
We have been paying ever since.
If the liberals ever want to quibble, they probably could have funded their various so-called “gems” in their Red book if they had not looted the national treasury in the 70′s if that was really their real intentions: Looting the treasury is the only goal they have.
Unfortunately, that is their way. Just look at the HRDC boon-dongle, gun registry, sponsorship, and when they lost power federally they continued on provincially — in Ontario Ornge, e-health, alternate power generation — mainly bird whackers. I personally know people who did well under federal liberals who are doing now in the Ontario public trough to the detriment of legitimate competitors once the federal trough was removed. They were quite open on how the system worked. You needed to be connected to the Liberal Party of Canada and shown loyalty to the party.
I agree that Mulroney government should have slashed and hacked at the very worst in the second half of their term in office but they dropped the ball. Problem was they were too Quebec focused and were worried about rocking the boat. I hate to say this but being elected and not liberal/ndp/green/left-wing-nut-jobs rocks the boat in the msm in Canada. PM Harper & Mayor Ford are perfect examples of the msm hostility even when you tone things down.
Going back to the original topic, problem is socialist governments spending beyond their means and thus causing problems down the line — In Europe it was the PIIGS (Portugal, Ireland, Italy, Greece & Spain mainly dominated by socialist governments till recntly) that created the problems. The same governments Mulcair want’s us to bail out and also kill our most profitable economy driver, i.e. the oil sands.
I digress, but this boils down to the fundamental problem: Government with out of control spending.
Where I live that is the Ontario Government under Liberals under McGunity and the NDP dominated city Councillors in Toronto. The inmates are running the asylum.
DARKHORSE
9 June 2012 at 18:19 (UTC -6) Link to this comment
Mulcair with his narrow-minded and completely irresponsible behaviour mouthing off about “Dutch Disease” makes me sick. One turn at power with that leftist bastard will have this country suffering from “Greek Disease”. No way. Someone please shut that p&*@# up and clue him in however necessary before it’s too late.
Taliesyn
9 June 2012 at 20:26 (UTC -6) Link to this comment
Alas, I must defend Mr. Mulcair’s right to say what he wants. I just ask that everyone stop listening to him.
Gerry from GTA
9 June 2012 at 18:59 (UTC -6) Link to this comment
I may get criticized for that, but the only thing I see positive from the NDP is the call to process the oil sands oil in Canada — I agree with that — why not — it is our resource. Refinery jobs would benefit Canada and adding value to a resource is a good thing. Only problem living up to that goal is to adjust the environmental legislation as most environmental legislation in place prevents that. Seems the NDP is against that also. They want their cake and eat it also.
Taliesyn
9 June 2012 at 20:31 (UTC -6) Link to this comment
Unfortunately sir, I work for the oil industry and I don’t see the benefit of upgrading and refining that much in Canada. The truth is there is very little “value-added” by refining. If you look at the books of most integrated oil companies, the money is in Production (i.e. getting the oil out of the ground). There is huge capital and operating cost to upgrade and refine, but the returns aren’t there to pay for it – largely due to competition from legacy refiners. Second, exporting crude means having crude oil pipelines. Exporting refined products means having “white oil” pipelines. And pipelining the latest Ultra Low Sulfur products is like handling a fine chemical – it is very easy to contaminate them and destroy the value. It makes more sense to refine the product near the end user.
The one exception to this logic is if you look at the Middle East. They are building refineries, largely for the bad logic of gaining that value-add. But they have an advantage over their largest market, that being Europe. They don’t have the environmental and labour regulations that drive up operating costs, and so they undercut the producers who are close to the end user. I don’t see Canadians voting for that…
Gerry from GTA
9 June 2012 at 21:03 (UTC -6) Link to this comment
The costs of refining oil — is the profit reduced due to regulation or something else?
Obviously there is a reason this is centralized in Texas & Louisiana. Is it because of taxes, environmental regulations, centralization of facilities, low taxes, cheap labour, etc etc?
As somebody who has background in failure analysis putting all of one egg’s in one basket is not a good thing economically?
Just curious.
Taliesyn
10 June 2012 at 13:20 (UTC -6) Link to this comment
The problem is a surplus of competition. This drives down product prices and leaves little profit for the refiner.
Cynical Bard
10 June 2012 at 18:45 (UTC -6) Link to this comment
So if we built 800,000 barrels per day of refinery near Edmonton, we would need two pipelines (at least) to move the product to where they it would be used, so the opportunity for protests would be three to five times what it is now………………
And those concerned with greenhouse gases, how much CO2 would be produced from that refinery, what with all the hydrogen that would have to be manufactured to make it all work?
But are there not people who know where hydrogen grows on trees, we could ask them. The know everything.
Even Google does not know that…………….
Ira
12 June 2012 at 17:16 (UTC -6) Link to this comment
Mulcair’s position annoys me because it rests fundamentally on one really shallow piece of analysis:
The Canadian dollar’s rise against the US dollar.
Why is that our standard? If we compare the value of the Canadian dollar to an average of other major currencies (the Pound, Euro, Yen, Yuan, etc.) we see a much smaller rise. Yes, against the US dollar the Canadian dollar has seen gains over 60%. But against other currencies, that gain is more like 20%.
Mulcair is failing to correct for the value of the US dollar. He’s treating it like a fixed benchmark, and it isn’t.