Don’t Hate Us Because We’re a Resource-based Economy!

So, we’re digging dirt and oil sands. It’s not as sexy as manufacturing high-tech thingies or fancy video games, but we got stuff the world wants and we’re making money from it. So sue us!

The past few years have been marked by what investment professionals call the super-cycle in commodities. The economic rules of supply and demand are simple and finite, and Canada has profited immensely from the upswing momentum in commodity fortunes (pardon, futures). Better yet, much of that same commodity processing has also been done in Canada. We have obviously done our part to squeeze as much juice out of the cycle as possible.

But, we cannot help noticing that the rest of the world is taking what we have to offer suspiciously — as if being a net exporter of commodities were a bad thing!

I suppose there is something behind the reasoning that Canada should not be only about metals mining and oil and gas. Surely, we have considerable timber and water resources to count on as well. However, at this point, other economic factors are simply not playing up to these industries.

As I have written in previous “Profit Confidential” columns, our soaring loonie has already eroded revenues in these sectors, rendering our water and timber simply too expensive for our largest trade partner south of the border. Although the same “loonie effect” applies to metals mining and oil and gas sectors as well, what is pushing the cycle forward at turbo speeds is the insatiable global demand for non-renewable resources, particularly from the emerging markets.

So what if we didn’t become a sleek high-tech powerhouse, and instead became a nation of miners and oil diggers? We tried, as everyone else, during the era of the 1990s. However, in the 21st Century, China and India emerged as super-consumers of commodities. They needed our metals, and our oil and gas, and it would have been both economically foolish and naïve not to oblige.

In our traditional contrarian nature, we should give some benefit of the doubt to analysts who have expressed concerns about Canada’s over-reliance on commodities. All that dirt, pollution and depletion of non-renewable resources couldn’t have come without some sort of a backlash.

Fears that our economy is going to adapt a worrisome image of being anti-environment are real and potentially based in reality. Mining and oil producing companies, not just in Canada, but all over the world, have notoriously poor standing among environmentalists, and that is not something anyone should ignore.

Another reason for concern is this question: who really benefits from the commodity boom? In Alberta, the government and oil companies are at war over royalty payments. Wealth-wise, Canadian Eastern and Western provinces are diverging more and more. While Ontario manufacturers are losing sales revenues, Alberta is swimming in cash, which it is apparently reluctant to share with the federation. And, what will happen to the Canadian economy if and when we run out of non-renewable resources? What is there in place to help the country switch gears?

Although these are valid concerns, at this point, our economy is commodity-based. It may not be as appealing as being a high-tech economy, but it pays the bills and pushes the wheels forward. I have to acknowledge, however, that it would only make more sense for the Canadian government to recognize and address all of the above-expressed concerns in a more meaningful and skillful manner, and prepare the country for the day when we’ll have to come up with another economic image.