Friday, 16 October 2015

Oil & gas industry critics misunderstand GDP breakdowns

By: Peter Radevski

Article originally published by the BOE Report on October 9th, 2015, and can be found here: 

Central Alberta Drilling Rig

With Canada’s election cycle heating up, and little more than a week to go, it should not be surprising that some very questionably presented figures have been thrown around by industry detractors. A particularly egregious example of this is a figure that has been making its rounds in the past few months, namely that the oil sands contribute “only 2 per cent [to] the national GDP.”
As a preliminary matter, it makes very little sense to include only the oil sands’ share, unless the goal is to further minimize the oil & gas industry’s overall importance to the economy.
The 2% figure is attributed to Statistics Canada (StatsCan). There is no cause here to dispute the accuracy of the raw statistic itself, but statistics without context are notoriously misleading. StatsCan’s own breakdown of 2012 GDP pegs oil & gas extraction – including oil sands – at 3.31% of GDP on average for that year.
Additionally, industry groupings are arbitrary and tend to obscure the links between different sectors. For example, oil & gas extraction is intimately tied to the generation, transmission, and distribution of electric power. It is similarly tied to natural gas distribution and petrochemicals refining. Further, there is substantial overlap between oil & gas and construction, retail, and professional services. Taking into account these overlaps and linkages, oil & gas’ share of GDP could be as high as 7.5%.
That said, it is prudent to use StatsCan’s more conservative 3.31% figure.
It helps to understand how this figure compares to other high-profile sectors of the economy. StatsCan averages aerospace at 0.55% of 2012 GDP. The auto industry’s share is 2.29%. Both trail oil & gas, significantly.
It is common knowledge that Canada, like all developed economies, is a service economy. Consequently, StatsCan averages the wholesale and retail sectors at 5.62% and 6.12% of 2012 GDP, respectively. Professional, scientific, and technical services – which includes lawyers, accountants, IT specialists, architects, and engineers, among other professionals – comprises 4.88% of 2012 GDP. A separate StatsCan source puts real estate at ~12.8% and construction at ~6.8% of 2014 GDP. The comparatively smaller figure attributed to oil & gas is a reflection of Canada’s diversified service economy, not of the oil & gas industry’s insignificance.
In this context, it should be abundantly clear that dismissing a sector of the economy as “only 2 per cent of the national GDP” is nonsensical, to put it charitably.
Consider that eastern Canada’s chronic economic woes are spurred in part by the travails of the auto industry. A similar dynamic can be observed in states across the border, with broad swathes of the Midwest’s once-thriving communities reduced to relics of a bygone era. It would not make sense to dismiss either Ontario or Michigan’s plight by saying “the auto industry is only a single-digit percentage of GDP.”
Regional industries can have an out-sized impact, both locally and nationally. In Ontario, the struggles of 2.29% of the national GDP translates into significant economic stress. The US auto industry comprises roughly ~3.5% of 2012 GDP. That in 2008, 3.5% of GDP had President Obama’s nascent administration scrambling to bail out the industry – to the tune of $79.68 billion and untold political capital – should dissuade anyone of the notion that single digit percentages of the economy are insignificant.
While that decision remains controversial to this day, it was premised on the recognition that the economy is a hyper-complex, interconnected machine. Consider that separately from GM and Chrysler, American auto parts makers comprised 2.3% of 2012 US GDP. This sensitive link factored heavily into the bailout decision, for it understood that the collapse of one economic sector would have repercussions in other sectors. What would the failure of “only 2%” mean for sales, construction, real estate, or professional services? What would the resulting economy-wide effects of depressed consumer demand have on Canada’s already struggling automakers?
Taken a step further, it is important to note that not all slices of the GDP pie are created equal. At 3.31% of GDP, the oil & gas industry punches substantially above its weight.
Revenue-wise, the energy industry contributed $25.1 billion per year on average between 2008 and 2012, comprising ~11.9% of total taxes paid. The industry also accounts for as much as 25% of the value of the Toronto Stock Exchange, is Canada’s largest private investor, and directly and indirectly contributes to roughly 500,000 jobs.
Of equal importance is the fact that oil & gas shares are a building block in the investment plans of untold millions of Canadians, from individual portfolios all the way to the gargantuan pension funds set up for public employees. The Ontario Teachers’ Pension Plan’s $3.3 billion acquisition of Cenovus’ royalty assets and the Canada Pension Plan Investment Board’s recent multi-billion dollar shopping spree for oil & gas assets stand as testament to this.
Finally, oil & gas also makes a substantial portion of Canadian exports, with StatsCan averaging crude oil and natural gas exports at 18.77% over five years. Factoring in refined petroleum products, that figure rises to 22%. Forestry products, automobiles, and aircraft, including components of the latter two, trail at 6.91%, 14.07%, and 3.78% of exports, respectively.
So, at the risk of overstating the point – and taking into account economic inter-dependencies coupled with the oil & gas industry’s out-sized influence – arguing that the oil sands is “only 2% of GDP” is like saying that the heart is only 0.3% of a person’s total weight.

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