Martin Pelletier: Canada should be fostering stability rather than holding back one of country’s biggest economic drivers
As you know, politics can exert a profound influence over financial markets. You only have to watch the daily fluctuations whenever there is a new development regarding tariffs or trade policies. Closer to home, I am increasingly concerned about the potential economic consequences should the Carney-led Liberal government secure another term — whether through a majority or a minority position.
My primary issue lies with the Liberal Party’s stand on oil and gas development, particularly their commitment to capping output and eventually phasing it out. The question that looms large is: at what cost? The implications for Canada’s economy could be profound, and recent findings from the Parliamentary Budget Officer (PBO) underscore the magnitude of the potential impact.
Last week, the PBO released its Impact Assessment of the Oil and Gas Emissions Cap, which paints a sobering picture. According to the report, “the required reduction in upstream oil and gas sector production levels will lower real gross domestic product (GDP) in Canada by 0.39 per cent in 2032 and reduce nominal GDP by $20.5 billion.” Furthermore, the PBO estimates that “achieving the legal upper bound will reduce economy-wide employment in Canada by 40,300 jobs and full-time equivalents by 54,400 in 2032.” These are not abstract figures; they represent real losses to the nation’s economic engine and to the livelihoods of thousands of Canadians.
This projected decline comes at a precarious time, as Canada faces serious economic headwinds from its largest trading partner, the United States, particularly under the leadership of President Donald Trump. In 2023 alone, combined exports of crude oil, natural gas liquids (NGLs) and natural gas accounted for $152 billion — about 20 per cent of total Canadian exports. The oil and gas industry is also a significant contributor to government revenues. According to the Canadian Association of Petroleum Producers (CAPP), the sector paid a record $34 billion in oil and gas royalties to provincial governments in 2022, and in subsequent years the figure is likely to come out to $20 billion annually.
The broader economic footprint of the oil and gas industry cannot be overstated. In 2023, the sector comprised more than three per cent of Canada’s total GDP, according to CAPP. The oil and gas extraction sub-industry is the largest goods-producing sector in the country, 27 per cent larger than the next biggest sub-industry, engineering and other construction activities and 30 per cent larger than the residential building construction sector. When considering direct, indirect, and induced employment, the oil and gas sector supports about 900,000 jobs across Canada. These are not just jobs, they are well-compensated positions. The average total compensation for a direct oil and gas worker is roughly double that of the average worker in other goods-producing industries.
Given these significant contributions, the decision to cap and phase out oil and gas production raises critical questions about the future of Canada’s economic prosperity. Instead of restricting output and the considerable economic benefits it provides, why not leverage the industry’s robust cash flow to fund a broader economic transformation?
Norway provides a compelling case study in this regard. The country has successfully embraced renewable energy and electric vehicles while simultaneously increasing its investments in oil and gas. In fact, estimates put Norway’s investment at a record US$22.9 billion in the oil and gas sector in 2024, according to the country’s statistics office. This is a clear demonstration that energy development and environmental sustainability need not be mutually exclusive.
From an investment perspective, Canadian oil and gas companies are being forced to adapt to a new reality where scale and efficiency are critical to maintaining access to capital, particularly if the current Liberal government retains power. This is why we view the recent merger between Whitecap Resources Inc. and Veren Inc. as an encouraging development. The creation of larger, more efficiently operated entities is a positive step in navigating an increasingly challenging regulatory and political environment. We hope to see more consolidation within the sector, especially among the mid-cap producers we currently hold, such as Baytex Energy Corp., Tamarack Valley Energy Ltd. and MEG Energy Corp. In our view, these companies are unlikely to realize their full value under current conditions unless they pursue strategic mergers or acquisitions.
In light of the prevailing uncertainty, we are reassured by our decision to reduce our exposure to the sector by half earlier this year. This adjustment allowed us to adopt a hedged strategy that offers significant downside protection. With so many unpredictable variables at play, ranging from potential tariff escalations from the United States to domestic regulatory risks, it is difficult to understand why the federal government would want to implement policies that pose further threats to such a vital industry.
At a time when Canada faces mounting economic challenges, policymakers should be focusing on fostering growth and stability rather than imposing additional burdens on one of the country’s most significant economic drivers. The stakes are high, and the consequences of missteps will be felt not only by investors but by everyday Canadians whose livelihoods depend on the continued success of the oil and gas sector.
