The post-2000 petroleum-led resource boom is substantially reshaping the Canadian economy. It has driven up the dollar exchange rate from 62 cents to parity with the U.S. dollar, squeezing out other export sectors: traded services, tourism, forestry, and most notably manufacturing, where it has dramatically reduced output and employment.

More than 600,000 manufacturing jobs have disappeared in the last decade. (Economists refer to this hollowing-out phenomenon as “Dutch disease,” after a similar occurrence in Holland in the 1960s.) The OECD estimates that the Canadian dollar is now 25% above its fair value or purchasing power parity rate of $0.81.

Reversing a 40-year trend towards higher-value finished goods exports, Canada is regressing to its traditional role as a resource exporter in the global economy. Two-thirds of Canada's exports are now unprocessed or semi-processed products, with higher value-finished products accounting for just one-third of our exports. Just over a decade ago, in sharp contrast, almost 60% of our exports were higher-value-added products.

Despite the resource surge since then, exports have not been sufficient to compensate for the decline of non-resource exports. Canada’s current account balance (goods, services, and investment income) averaged a $48 billion deficit in the last three years.

The epicentre of the petroleum boom is Alberta. By far the richest province in Canada, it continues to distance itself from the manufacturing heartland of Ontario and Quebec, with its GDP per person reaching $48,500 in 2011.

A recently published report by the Parkland Institute paints an unflattering picture of how the Alberta government been managing its oil wealth. It calculates that, since 1986, the oil industry has reaped $260 billion in pre-tax profits from the tar sands while the public share has been less than $25 billion.

According to the Parkland report’s author, David Campanella, under a weak royalty framework that was effectively drafted by the oil companies, the Alberta government has been able to collect less than half the economic rents — or excess profits — from conventional oil over the last decade, and just 9% of the rents from the tar sands. Moreover, provincial oil company income taxes are set at a very low 10%.

In 1976, the Alberta government created a Heritage Fund to manage its oil wealth, protect against economic instability, and provide a buffer for future generations. Today, however, 36 years later, the fund contains a mere $15 billion.

With virtually no oil wealth set aside and insufficient revenue flowing into government coffers, Alberta has been running deficits for the last three years. Its education, health care, and other public services are underfunded. Inequality and poverty in the province are among the highest in Canada.

Yet, during the recent provincial election, the Progressive Conservatives and the Wild Rose Party both committed to maintaining petroleum royalties and taxes at rock-bottom levels.

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Alberta is not an island. It is a partner in the Canadian federation. The federal government is responsible for managing the impact of the oil boom on the nation as a whole, for minimizing the negative effects of “Dutch disease” on the rest of the national economy, for ensuring that Canada is meeting its international legal obligations to reduce carbon emissions, and for enhancing the well-being of all Canadians.

To meet these responsibilities, the federal government has the authority, for example, to impose an oil export tax, or levy a special oil company tax to capture a greater share of the economic rents, or impose a carbon tax. It could instruct the Bank of Canada to include, among its monetary policy priorities, an exchange rate that ensures the long-term viability of non-resource exports.

Clearly, the current government does not interpret its responsibilities in this fashion. The federal corporate income tax rate (including on oil companies) is now just 15%, down from 28% a decade ago. Low taxes and free trade pretty much sum up its hands-off approach to this very serious economic challenge.

Far from taking its climate change obligations seriously, the Harper government is moving in the opposite direction: cutting research capacity, cutting retrofit and other conservation programs, and weakening environmental reviews of ar sands initiatives — even as it continues to hand out $1.4 billion in annual subsidies to the fossil fuel industry.

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Norway provides a stark contrast to Canada’s management of its resource wealth. With a population comparable to Alberta’s, Norway is the world's seventh largest exporter of oil and the second largest exporter of natural gas. Its oil and gas exports in 2010 were US$78 billion, compared to Alberta's exports of $51 billion.

Norway has managed its oil wealth extraordinarily well. It has integrated natural resource industries with the rest of the economy, and has developed institutions to handle shocks to its economy caused by oil price volatility and currency pressures. It has also wisely used a portion of its oil and gas wealth to provide one of the most generous and sustainable social welfare systems in the world.

A centrepiece of the Norwegian model is its petroleum fund — called the “Government Pension Fund–Global.” Created in 1996, and ironically patterned after Alberta's Heritage Fund, it has amassed some $550 billion, and continues to grow.

All government revenues from petroleum — including various taxes as well as profits from direct state ownership — are transferred to the Fund, which then invests exclusively in foreign securities. Only the long-term real return on Fund investments (valued at 4% of assets) is put back into government coffers (amounting to one–quarter of state revenues) for public expenditures. The Fund has now reached a size where the annual return on its investments is greater than its annual oil revenues. It has effectively converted its oil wealth to financial wealth.

By separating oil revenues from the rest of the economy, Norway has insulated itself from “Dutch disease.” Norway has a stable, high-productivity, highly unionized economy with 3.3% unemployment and 1.6% economic growth in 2011 — a stable currency, a healthy budget surplus, and a balance of payments surplus.

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What accounts for Norway’s success? First and foremost, the state retains control of all aspects of petroleum activity and sets the rules by which the private oil companies play. In Canada, by contrast, the major oil companies are in the driver’s seat in determining oil policy.

The Norwegian government levies a 28% ordinary tax rate on oil companies. On top of this, it imposes an additional 50% tax to capture the economic rent, or excess profits, for a combined 78% marginal tax rate. Companies, however, can claim reimbursement of the tax value of exploration costs and other development costs.

Companies also pay environmental taxes and various fees. But there is no royalty regime.

Finally, the government owns two-thirds of Statoil, the Norwegian oil giant, from which it collects a huge cash dividend.

Petroleum has been integrated with the rest of the economy through active industrial policies that create forward and backward linkages to the capital equipment, oil-rig construction, petrochemicals, and other sectors.

There is also a deeply held egalitarian consensus within Norwegian culture. It has one of the lowest levels of inequality in the world. It is a high-tax country whose tax revenue constitutes 42.8% of GDP, compared to Canada's tax revenue at 31% of GDP. Social expenditure per person in Norway is almost double the level in Canada. The proportion of low-wage workers in Norway — that is, who earn less than two-thirds the median hourly wage — is 8%; in Canada it’s 20.5%.

For many countries, oil wealth, has been more a curse than a blessing. The Venezuelan founder of OPEC once described oil as “the devil’s excrement.” The Norwegian example, however, shows that, properly managed, oil and gas resources can be a blessing.

Unfortunately, the conditions enabled Norway’s success, are not in place either in Alberta or nationally in Canada.

This article was originally published in the Hill Times.

Bruce Campbell is the Executive Director of the Canadian Centre for Policy Alternatives