Oil dependence good for country, Carney says

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Bank of Canada governor Mark Carney prepares for his speech in Calgary. (JEFF MCINTOSH / THE CANADIAN PRESS)

CALGARY -- Canada's reliance on oil is "unambiguously good" for the country as a whole -- not just the West -- Bank of Canada governor Mark Carney said Friday in a speech that called for more pipelines and dismissed fears about so-called Dutch disease.

Rather than blame high-priced oil and other commodity exports for the decline in manufacturing, central Canada should seize more of the bounty by building pipelines to refineries where the markets are in Ontario and Quebec.

"Higher commodity prices are unambiguously good for Canada," Carney told a conference of business leaders and international policy-makers in Calgary. "The strength of the Canadian resource sector is a reflection of success, not a harbinger of failure."

Canadians should find new ways to take advantage of the strength, Carney said. He pointed out eastern Canadians are importing oil at prices that average $35 a barrel more than what western heavy oil producers receive.

"New energy infrastructure -- pipelines and refineries -- could bring more of the benefits of the commodity boom to more of the country," he said.

The central bank governor has spoken before against critics of Canada's dependence on natural resources, particularly as rising demand from emerging markets in Asia have caused prices to rise and the Canadian dollar to climb to and past parity with the U.S. The flip side has been that manufacturers have found it difficult to cope in foreign markets, a phenomenon dubbed Dutch disease.

NDP Leader Thomas Mulcair this year blamed the dynamic for the decline in central Canada's manufacturing sector, since their exports have become uncompetitive in global markets.

"It's a very tidy argument that's appealing. Making commodities the scapegoat is tempting. But in the view of the Bank of Canada, it's an overly simplistic assessment and in the end, it is dead wrong," Carney said.

"Our economy is much more diverse and much better integrated than the Dutch disease caricature."

He acknowledged high commodity prices have lit a fire under the loonie, contributing about half its appreciation over the past 10 years. Meanwhile, manufacturing as a share of the economy has fallen from 18 per cent to 11 per cent today.

However, he pointed out Canada's experience is shared by many advanced countries, including those without resource riches, and exchange rates only partly explain what is occurring. And there has been an offset, he added.

"It is important to recognize that, for almost all the provinces, trade inside Canada has grown fast enough to offset a significant portion of the declines in international trade," he said.

"Central Canada suffered a real decline in international exports of $18 billion between 2002 and 2008, which was almost entirely offset by increases in interprovincial exports of $16 billion."

Some of the increase reflects sales by central Canadian machinery makers, primary metal producers and chemical companies to Western Canada.

More importantly, Carney said, exports of oil and other commodities have brought greater wealth into the country, including generally higher incomes and greater economic activity.

Carney also dismissed calls for him to intervene in the currency market to devalue the Canadian dollar, which now trades above parity with the U.S.

In the short term, that could help exporters of manufactured goods, he said, but ultimately wages and inflation would need to rise, putting manufacturers back in uncompetitive territory.

"The cost of this misadventure is lower output of about one per cent and higher volatility in inflation, output and employment than when the exchange rate is allowed to do its work," he said.

-- The Canadian Press

Republished from the Winnipeg Free Press print edition September 8, 2012 B4