Don’t worry about Canada becoming a ‘petrostate’

In a recent Bloomberg article, economist Noah Smith warns Canada against becoming a “petrostate.” Petrostates, he writes, are countries that “depend on oil for large percentages of their exports.” He writes further:

The problem with the petrostate economy is basically one of diversification. You wouldn’t put half of your wealth into a bet on the price of a single commodity, would you? Well, that is effectively what petrostates do.  

He needn’t worry and, more to the point, Canadians need not worry. A little numerical analysis shows why.

Canada’s total oil output is about four million barrels per day. Assume a world price of about US$50 per barrel. The market value of Canadian oil produced in a day, therefore, is $200 million. In a year, the market value is $73 billion.

Now, $73 billion is big number. But compare it to the size of Canada’s economy. Canada’s Gross Domestic Product (GDP) this year will be about C$2 trillion, or about US$1.55 trillion. So the value of Canada’s total oil output is just under five per cent of GDP. That hardly makes it a petrostate.

Compare that to an actual petrostate: Saudi Arabia. In 2015, Saudi GDP was about US$1.68 trillion, roughly the size of Canada’s. And Saudi oil production averaged about 10 mbd. At a price of $50, that’s $182 billion per year, which is about 11 per cent of GDP.

In other words, Saudi oil is more than twice as important to the Saudi economy as Canadian oil is to Canada’s economy.

But imagine that Canada’s oil production grows so much that it becomes as important to Canada as oil is to Saudi Arabia. Is that bad?

No. First, Canada is a vibrant democracy with competitive political parties and a fair amount of civil and economic freedom. Not so Saudi Arabia.

Second, although many people, including Smith, worry about “Dutch disease,” a situation where strong oil exports keep the value of the currency high so that manufacturing suffers, Dutch disease isn’t even figuratively a disease. It’s just simple comparative advantage. The exchange rate is a price. It signals whether it makes sense to produce and export more oil or to produce and export manufactured goods.
There are many things to worry about in the Canadian economy: the growing level of federal debt, government pensions that are high and rising, and a heavy degree of regulation. Something not to worry about: more oil production.