Over a barrel: Canada’s oil industry is a drain on productivity, research shows

Heavy investments in the oil industry make Canadian productivity look frail, new research from McMaster shows. 

A paper published by Social Sciences Research Network looks at the fossil fuel industry’s impact on Canada’s economic output in terms of total factor productivity (TFP) — the measure of growth in economic output, not explained by increased use of labour and capital in production. 

TFP is an important indicator of growth and represents an economy’s ability to produce more with the same resources. 

“An economy needs productivity growth or else it will fall behind competitors. If productivity is not growing, you should be worried,” says co-author Pau Pujolas, an associate professor of economics at McMaster.  

“Canadian policymakers and academics are entertaining a lot of solutions to this problem, but we found the oil sector is masking the truth — Canada’s economy is growing at a healthy rate.” 

Looking at all industries, the researchers found Canada’s TFP grew.08 per cent annually between 2000 and 2018. With the oil industry excluded from the data, the TFP growth ballooned eightfold to .65 per cent.  

The trend had developed recently, researchers found, with no similar correlation between the oil industry and TFP seen from 1960 to 2001.  

The trend emerged in the early 2000s after Canada’s oil production started dramatically increasing to 4.5 million barrels daily in 2023 from 2.1 million barrels per day in 2000.  

The surge in production was likely driven by oil price increases and technological advances that helped turn Alberta’s oil sands into the largest contributor to Canadian oil production by 2009.  

But the capital investments to make the oil sands economically viable have been masking overall productivity growth in the rest of the economy, researchers say. 

“When the price of oil was about $20 per barrel, it didn’t make sense to invest and produce oil from the oil sands. As the price of oil multiplied five-fold over a decade, companies realized they could make some bucks from this,” Pujolas says.  

“The investment in the oil sands was very small until the mid-1990s.” The oil sands went from accounting for less than 5 per cent of the oil industry’s investment in Canada to almost half of it. 

“We’re not saying that [the oil sands] are necessarily a bad thing. Entrepreneurially, it probably made sense. But it’s certainly the cause for the for the lack of TFP growth.” 

A similar trend did not materialize in the U.S., researchers say. A comparison of the same data showed TFP rose steadily there; excluding the oil industry had little effect on the result. 

“With the oil industry excluded, TFP in Canada grew very similarly to that of the United States. The difference is so minimal you could think it was a measurement error,” says Pujolas. Between 2001 and 2018 they managed to grow their productivity across all industries by nine percentage points. 

“When we exclude the oil industry, it looks like Canada has been able to do the same.” 

While the paper attributes the recent lack of TFP growth to the oil sector, data showed that between the 1970s and 1990s, the oil sector did not have the same effect. 

“Don’t worry about the productivity of the Canadian economy,” Pujolas says. “If you want to worry about anything, worry about the oil sector.”