Look Up Waaay Up (North)
By Peter G. Hall *
Vice-President and Chief Economist Export Development Canada
There's nothing like a price spike to fire up interest in resource exploration. Worried about running short of basic materials, mining companies have taken a special interest in more remote areas on the planet - including Canada's North. They're not the only ones - generals, politicians and diplomats are also in the fray. While the full potential of this vast territory, particularly 'north of 60', is far from understood, it is already clear that exploration in the Northern “space” will act as a long-term engine for our country. But can we cope with all the activity?
You don’t have to go very far to find it. There's the Ring of Fire in Ontario, the Northern Gateway project in Alberta and BC, “Le Nord pour tous” in Quebec, the oil sands in Northern Alberta, among others. Natural Resources Canada cites plans for 600 major resource projects worth $650 billion over the next 10 years, with an estimated full impact of $1.4 trillion. If only 25% of these projects are completed, it would still boost real GDP by 1.3 to 1.9% within the next decade. Given the long-run growth outlook for Canada is forecast at roughly 2%, this development could add 0.2 per cent to Canada’s annual potential output – a true game-changer.
Added to this is the far North. Energy giants are eyeing the Arctic, believed to hold the world’s last major undiscovered oil and gas deposits. While US shale production has depressed prices in North America, higher prices in emerging markets and elsewhere will ensure the search remains financially viable. As of September 2012, Natural Resources Canada counts 24 such projects worth $38 billion in some stage of development. Clearly some are not waiting for more ice to melt.
Sum them up, and the numbers are huge. So much so, in fact, that it raises an awkward question: can the Canadian economy absorb what's coming our way? It’s a good question. A large chunk of Canada’s labour force will begin a five-year decline in 2016, making workers hard to find. Capital may well be in short supply, raising the importance of international partners, who in 2011 alone brought in resource direct investment of $213 billion.
There are further challenges. The North sorely lacks infrastructure, including telecommunication networks, health services, land transportation routes and deep-sea ports to take goods to market, not to mention existing North American transportation constraints. There are also environmental hurdles to overcome, to ensure sustainable development and the prosperity of local Aboriginal communities.
Though further expansion of primary resources increases Canada's exposure to the commodity cycle (natural resources already represent 15% of our GDP), there are other benefits. First, it will lead to development of extractive technologies and services, useful the world over. Second, it promises to extend a 10-year trend of export diversification into emerging markets. Finally, it creates the opportunity to showcase socially responsible and sustainable resource development - Canadian style.
The bottom line? Higher costs notwithstanding, the economic opportunities in Canada's North seem boundless. But attracting investment will require careful strategy - ensuring that there are adequate means of getting output to customers; that labour supply is sufficient; that development is done in a socially responsible way; and that development does not come at the expense of other sectors of the economy. There's clearly a lot of work to be done, but the numbers clearly demonstrate that it is worth the effort. The present time sure looks like a moment of great opportunity.