Mark Carney strode in front of the most powerful members of Canada's energy industry with a message that was sure to please: the Bank of Canada has done the math, and oil companies are not setting the country on a course of economic destruction.
In short, he said, high oil prices aren't hurting Canada.
"In a world of elevated commodity prices, it is better to have them. Bank of Canada research shows that high commodity prices, regardless of the cause, are good for Canada," he said.
Strong crude pricing does force a rise in the loonie, he said. But the overall impact is a net rise in "income, wealth and GDP in Canada." While the higher dollar does harm non-commodity exports, that pain is "partially offset by the fact that a stronger currency reduces the cost of productivity-enhancing machinery and equipment imports," he said at the annual Spruce Meadows Round Table just south of Calgary, which draws business leaders from across the world.
And, Mr. Carney added, any central bank efforts to ward off so-called Dutch disease – by tampering with Canada's currency to protect manufacturers, for example – are likely to do more harm than good.
"The logic of Dutch Disease requires us to undo our successes in order to depreciate our currency," he said. Taken to "its natural conclusion, this logic dictates that we shut down the oil sands, abandon our resource wealth, have high and variable inflation, run large fiscal deficits and diminish our financial sector."
That would, he concluded, ultimately "weaken Canada."
Mr. Carney's comments, which he said were an effort to lay a proper factual groundwork rather than wade into an ongoing political debate, arose from a sophisticated analysis conducted by the Bank of Canada. It modelled the effects of a 20 per cent rise in energy prices in several scenarios, including one driven by U.S. growth, another driven by Asian growth and a third driven by other factors, like a geopolitical shock.
In all cases, he said, the economy gains. The most significant boost comes in the U.S. scenario, which produces a 3 per cent, or $57-billion, rise in GDP over five years, as U.S. economic strength boosts demand for a wide array of Canadian products. That scenario, however, is "fast becoming a historical artefact," he said, as energy demand is increasingly driven by other parts of the world.
Yet even when oil prices are pressed higher by Asian demand, Canada sees a 1 per cent net GDP gain over a half-decade. The more muted boost is due to Canada's weaker Pacific trade ties, which provide a diminished ability for the rest of the economy to benefit.
In the final scenario, where an oil price shock arises from factors outside of economic growth – take unrest in Libya, for example – the GDP still sees a net gain of 0.2 per cent in the first year.
Part of the reason the country benefits from higher oil prices, Mr. Carney said, relates to the impact of a thriving energy industry on domestic trade, as machine shops in Ontario and workers in Atlantic Canada benefit from western strength. History shows how powerful that trade is: between 2002 and 2008, central Canada witnessed an $18-billion drop in international exports. During that same period, it saw a corresponding $16-billion pick-up in interprovincial exports.
Yet that dynamic also serves to illustrate the transitional pain caused by higher oil prices, as the decrease in international exports came largely from the goods sector, while services saw the most benefit from the domestic trade.
In other words, the total economy may be accelerated by high oil prices. But individual parts of the economy will, without question, be hurt. Since the turn of the millennium, Mr. Carney said, the manufacturing share of the Canadian economy has fallen from 18 per cent to 11 per cent, although he noted that other OECD countries have seen more precipitous declines.
A time of higher energy prices "does bring difficult adjustment," Mr. Carney said. He added: "We wouldn't say that the right response to higher commodity prices is laissez-faire, is to just to do nothing."
Instead, he said, Canada needs to maximize its returns from pricey oil, by diversifying toward markets driving energy demand, by pursuing more value-added work in Canada and by improving energy efficiency.
Perhaps not surprisingly, the repudiation of the idea that the oil industry contributes to Dutch disease won favour with a crowd that included the heads of Suncor Energy Inc., TransCanada Corp., Imperial Oil Ltd. and Devon Canada.
"If you really think about it, the argument is way too simple that high commodities lead to an uncompetitive economy," said Rick George, former chief executive of Suncor. Energy "is very important not just to Alberta, but to manufacturing in Ontario and Quebec and even to the workers that come out of the Maritimes."
And having the Bank of Canada make the argument can't hurt, he said: "Facts always prevail."
Imperial chief executive Bruce March acknowledged, however, that the Bank of Canada analysis was unlikely to reverse arguments, tendered federally by the NDP and elsewhere by the province of Ontario, that rising oil prices are hurting the country.
Structural economic change happens over the course of decades, far longer than "the political time frame which drives an awful lot of other decision-making along the way," he said. Still, Mr. Carney's analysis "was certainly positive" and matched Imperial's own views of the Canadian economy, he said.