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Economist Blasts Rosy Reports on Canadian Oil Economics

Four documents extolling oil sands and Gateway pipeline more 'propaganda' than business cases, says Robyn Allan.

By Andrew Nikiforuk 11 Apr 2012 | TheTyee.ca

Award-winning journalist Andrew Nikiforuk writes about energy for The Tyee and others. Find his previous Tyee articles here.

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Economist Robyn Allan: 'Canadians are being railroaded' into meeting energy security needs of U.S., China before those of Canadians.

A flurry of positive economic reports extolling the benefits of rapid bitumen development and the Northern Gateway pipeline base their conclusions on poor data that "are misleading and misrepresentative of economic reality," says independent economist Robyn Allan.

The reports "present an illusion of economic well-being" created from rapid oil sands growth by omitting key trends such as oil price shocks and by using inappropriate economic models, adds Allan, a retired financial economist and former CEO of the Insurance Corporation of British Columbia.

The 56 year-old economist describes the reports "as quantitative billy clubs to beat back public inquiry," designed to discourage real debate about costs and benefits.

"No corporate executive or corporate board would make a decision to expand a project based on the sort of flimsy and one-sided information presented in these studies," adds Allan, once rated by the National Post as one of Canada's top 200 CEOs.

"Why are politicians passing off reports as a business case for a pipeline when no one in business would rely on data based on only one scenario and with no sensitivity analysis over a 30-year time period?" asks Allan.

Flawed analyses ignore key factors: Allan

Allan's 33-page analysis, which will be posted on her website later today, critically examines the assumptions employed by Enbridge's Application to the National Energy Board; several studies by the Canadian Energy Research Institute (an organization funded by industry and government); a pro-Gateway study by the University of Calgary School of Public Policy (an institution largely funded by Imperial Oil) and a Wood Mackenzie Report prepared for the Government of Alberta.

Both Finance Minister Jim Flaherty and Natural Resources Minister Joe Oliver have cited CERI studies that allege that trillions of dollars of benefits and hundreds of thousands of job years will pour from rapid oil sands growth, while Premier Alison Redford has championed both CERI and Wood Mackenzie studies.

The Wood Mackenzie report claims that Canada would add $78 billion to corporate coffers with an approved Gateway pipeline between 2017 and 2025.

Yet these optimistic studies are seriously flawed and misrepresent key economic facts because they don't account for the negative impact of rising oil prices on the Canadian economy or manufacturing sector. In addition, almost all the reports base their inflated benefits on artificially low Canadian exchange rates.

More than 80 per cent of Enbridge's alleged $270 billion boost to GDP growth, for example, disappears when fair and reasonable exchange rates are accounted for, says Allan. Both the Enbridge and Wood Mackenzie reports assume that the Canadian dollar will remain at 85 cents in value to the U.S. dollar for 30 years in the Enbridge case and 10 years for Wood Mackenzie. Allan calls that assumption "a ridiculous" scenario that even confounds Bank of Canada forecasts.

"If the dollar is at par and oil sells for US$100 per barrel, gross revenue is CDN$100 per barrel," explains Allan. But if the dollar rises to $1.05 that same barrel is worth $95.24 Canadian, a decline in gross revenue of 4.76 per cent."

The appreciation of the Canadian dollar, now driven by oil and commodity exports, not only squeezes the oil industry and reduces royalties. It also increases the cost of exports and leads to slower growth and job losses for the entire economy, a phenomenon known as the Dutch Disease.

Rising dollar will distort predictions: Allan

Three of the four studies also use an Input Output economic model (IO) that even economists agree is inappropriate for the measurement of overall economic health.

"IO models have severe limitations, exaggerate benefits and ignore economic costs," says Allan. Because the model doesn't incorporate the costs of rising oil prices on the economy, its conclusions on rapid resource extraction are inaccurate and misleading.

An Input Output model, which has no feedback mechanisms, would conclude that a $1.5 billion fire at Suncor was good for the economy and that the Vancouver Canuck riot was a "growth generating event," says Allan.

Dynamic models used by the Bank of Canada, for example, have concluded that rise in oil prices directly impacts monetary policy and result in permanent decline in real wealth flows in the country.

Last week Mark Carney, the Governor of the Bank of Canada, called for the sustainable development of natural resources that recognized and ended Atlantic Canada's heavy dependence on foreign oil.

Several studies by the Canadian Energy Research Institute acknowledge the negative impact of a raising petro dollar on the economy but don't apply these findings consistently.

The government and industry-funded think tank predicts in its most recent report that the Canadian dollar could rise to $2.08 by 2030 with rapid oil sands development but then assumes in its studies that the dollar remains fixed on par with the U.S. currency.

Using a "false exchange rate reality" guarantees happy forecasts that ignore the sort of extreme variability and volatility that rising oil prices will actually bring, says Allan.

Reports' funding linked to oil industry

A report by the University of Calgary School of Public Policy titled "Catching the Brass Ring" predicted that the building of Keystone XL and Northern Gateway pipelines would reap price increases between $7.20 and $13.60 per barrel of oil.

Yet Allan found that the report offers no clear discussion of how the calculations were developed.

Moreover, Natural Resource Minister Joe Oliver in a January speech to the B.C. Chamber of Commerce cited the report as evidence that Asian markets would bring $132 billion to Canada's GDP between 2016 and 2030. Yet the authors of the report believe that Northern Gateway would only deliver a paltry return of $5.2 billion.

Allan submitted a series of questions to the school but she was not allowed to speak with its authors. The school promised a reply to her queries more than a month ago. She still hasn't received one.

The controversial school is largely funded by Imperial Oil Foundation.

Its director, Jack Mintz, sits on the board of Imperial Oil Canada and holds shares in the oil sands developer.

"The Brass Ring seems more like propaganda for resource expansion than a reliable independent research report," says Allan.

The Wood Mackenzie report, funded by the Alberta government, also bases its rosy forecasts on artificially low exchange rates as well as taking advantage of price discrimination through non-market forces in Asia.

Saudi Arabia's national oil company, Saudi Aramco, now charges a higher price for oil in Asian markets due to long-standing predatory and discriminatory pricing practices. Most of the alleged benefits from the Northern Gateway come from piggy-backing on this price differential.

"It is difficult to understand how the oil industry and government proponents argue that the need for Northern Gateway is driven by market forces, when access to Asian markets is desired by producers in order to capture higher prices that are not determined by market forces but price discrimination," says Allan.

Given new Russian oil supplies for the Chinese market, the premium will likely disappear, says Allan. Moreover China's state-owned oil companies could then drive down oil prices for Chinese consumers by producing, shipping, and refining Canadian bitumen with a minimum of open market sales. In fact, three firms directed by the Communist Party of China have invested more than $20 billion in the oil sands over the last four years.

Allan, who is now retired and lives in Whistler, B.C., told The Tyee she did her review of the reports "on my own time and my own dime" over a couple of months as "my contribution to the public interest." 

Allan said she has grown frustrated with the way political leaders and the media uncritically embraced big numbers presented by the studies.

"The exaggerated and erroneous quantitative analysis arising from these studies" have been spread by the media and politicians with no context or balance. "The public is being denied one of their basic democratic rights -- access to accurate and reliable information."

'Canadians are being railroaded'

Concludes Allan in her report: "Canadians are being railroaded into accepting a resource strategy which would meet the energy security needs of the U.S. and China before addressing the energy security needs of Canadians."

In February the Alberta Federation of Labour released another critical report by Allan on the Enbridge pipeline. It found that the controversial project would raise the price of oil in Canada and thereby impair the nation's manufacturing sector and financial stability.

Studies by the Bank of Canada have reached similar conclusions. 

One 2011 study on the price of crude oil reported that "the fairly tight and long-standing relationship between energy prices and the Canadian dollar implies that fluctuations in oil prices affect the overall competitiveness of Canadian exports in the rest of the world.

Changes in the value of the Canadian dollar related to financial speculation in the oil futures market could have important effects on the allocation of resources among different sectors of the Canadian economy."  

[Tags: Energy.]  [Tyee]

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