Why Canada should think twice before building more refineries

If, when you hear “value-added,” you think “income,” you’re already 99 percent of the way there. So, to suggest that raw extraction—like oil and gas production, or exporting logs from B.C.’s timber harvests—is not value-added is effectively to say that such activities do not generate income. That’s clearly false. According to the most recent data from Statistics Canada, each dollar of output from oil sands extraction generates 64 cents in value-added. For conventional oil and gas, the figure is 58 cents. By contrast, petroleum refineries generate only 24 cents of value-added per dollar of output. Yes, resource extraction is capital-intensive, and much of the income flows to capital owners to recoup large past investments. Some may argue that this shouldn’t “count,” and that we ought to focus strictly on wages. While I disagree, it’s worth considering. Oil and gas extraction generates 11 cents in labour income—wages, salaries, and benefits—for each dollar of output. For conventional oil and gas, that figure is 23 cents. For petroleum refineries? Just 7 cents per dollar. This doesn’t mean refineries don’t generate a lot of value, of course. Measured as value-added per hour worked or per job, refineries are (in the latest data) on par with oil and gas extraction. Both at just under $700 per hour and both around $1.4 million per job. To be clear, these statistics don’t say anything about whether refinery operations are too large or too small, or whether oil and gas extraction operations are either. They simply reject the simplistic intuition many have that “processing” and “value-added” are somehow synonyms. Subsidies can shrink our economy So, what would subsidies to refineries really achieve? Simply put, subsidizing refinery operations would shift labour and capital away from higher-value activities and into a lower-value one. This is, at its core, a misallocation of resources. The market is telling us that our economy does not have a comparative advantage in refining oil at the margin. Our economy might very well shrink if we try to refine more when American and Chinese (or whoever else’s) refineries have the advantage. In a well-functioning market, subsidizing new refinery capacity would reduce the overall income generated in Canada’s economy. Shifting resources toward them through public dollars shrinks our economic pie since absent the subsidy labour and capital would have gone elsewhere to higher-value activities able to pay market rates. Exceptions to the rule There are rare cases where subsidies might be justified—specifically, if they address a genuine market failure. In such cases, the market may be allocating labour and capital in a way that does not maximize total value. For example, limited pipeline capacity can create congestion externalities: the costs of that congestion are borne widely, and refineries, by reducing demand for pipeline space, could help ease that pressure. The logic is similar to the potentially beneficial policies that might divert drivers off congested roads. In the case of congested pipelines, Alberta’s curtailment policies in 2019 were an attempt to address this extremely costly situation. At least in the short-term. Expanding export infrastructure is far better and more than pays for itself if production is sufficient to justify the new pipe. Still, designing a well-calibrated refinery subsidy to address such a narrow and specific issue is enormously difficult—and certainly not what Premier Eby was proposing. Instead, his pitch mirrors many others: restrictions on raw log exports to benefit mills, pulp and paper facilities, or other processors; or simply reflects the general stigmatization of resource extraction as “not value-added.” But as we’ve seen, that perspective is incorrect. How to really increase “value-added” Resource extraction for export is among the most value-generating activities in Canada’s economy. And it’s precisely because these activities generate so much value that downstream processing often isn’t worthwhile. To lean against that reality with public subsidies would harm, not help, our economy. It would be equally harmful to support resource extraction activities with subsidies (again, except where clear market failures are being addressed). Markets generally do an exceptionally good job of allocating where labour and investment capital need to go. At a time when Canada should be focused on boosting investment and productivity to secure long-term prosperity, interfering with this process by providing refinery subsidies in order to implicitly block pipelines does far more harm than good.