Natural resources contribute significantly to Canada’s total wealth. The value of this contribution fluctuates with prices, stocks and extraction costs. Fuelled by rising resource prices, Canada’s natural resource wealth grew, on average, 10% per year during the last decade. This growth rate would have been higher if extraction costs had not risen significantly during this period. In 2006, natural resource wealth—the dollar value of selected natural resource reserves—stood above $1 trillion or more than $30,000 per capita.1 The physical sources of this wealth, natural resource reserves, were relatively stable during this period.
Over the last decade, natural resource wealth accounted for between 12% and 19% of Canada’s total wealth (Chart 1). Natural resources not only generate wealth but also contribute raw materials to create other types of wealth such as buildings, bridges, machinery and equipment. Timber and iron are used extensively in constructing houses and bridges. Machinery and equipment are made from a variety of metals such as iron, copper and zinc. As well, these resources are components of consumer durables such as cars and computers.
Natural resource wealth plays an important role in generating income. Businesses invest capital and employ people to produce, process, market, transport and export resources. By doing so, they earn profits and pay taxes and royalties to the provincial and federal governments. These investments, exports, profits and taxes (including royalties) are significant components of Gross Domestic Product (GDP) or current income. As well, resource wealth will generate a stream of future income. This article provides key information and trends related to Canada’s resource wealth over the last decade.
Energy, minerals and timber are accounted for
Total resource wealth shaped by energy resources
Supply and demand are the key to prices
Natural resource reserves were relatively stable
Extraction costs increased rapidly
Statistics Canada’s current wealth estimates are based on those resources for which all the necessary data for valuation are available. The resources fall into three categories: energy, mineral and timber resources.
Energy resources include natural gas, crude oil, crude bitumen (oil sands) and coal. Mineral resources include gold-silver, nickel-copper, copper-zinc, lead-zinc, iron, molybdenum, uranium, potash and diamonds.2 Timber reserves include timber stocks that are physically accessible and available for harvesting.
Other renewable resources, such as fish and fresh water, are not included at this point due to a lack of the necessary data and methods to assign a value to these resources. Total natural resource wealth would be even higher if these resources were included.
Note to readers
Resource wealth mainly depends on the sales revenue from extracted resources, extraction costs and the remaining reserves. For mineral and energy resources, reserves are defined as the amount of proven and probable stocks that are profitable to extract using available technology.
The amount of the stock that is extractable with available technology and that is profitable to extract, is considered the economically recoverable reserve. Thus, reserve estimates can change due to several factors including the change in resource price, extraction costs, as well as new discoveries and depletion of stocks.
To calculate natural resource wealth, first resource rent—sales revenue minus extraction costs—is determined. Suppose last year’s reserve of a mineral resource was 15 units and 5 units were extracted. Then the remaining reserve would be 10 units. If sales revenue from the extracted 5 units was $50, and the total extraction costs were $30, then the resource rent would be $20.
Assuming that all these factors stayed the same, the remaining reserves would generate $20 worth of rent in each of the following two years. However, $20 at the end of year one and two is worth less than it is now. Assuming a 5% annual interest rate, also known as the discount rate, estimated wealth of the remaining reserve would be:
For timber resources, only the stocks that are physically accessible and available for harvesting are included as part of natural resource wealth estimation. Because timber is a renewable resource, its wealth calculation is based on the assumption that the stream of rent will be available for an infinite period.
In 1997, the value of Canada’s natural resource wealth approached $500 billion. Within a decade, the value of natural resource wealth exceeded $ 1 trillion . On average, natural resource wealth grew by 10% per year, from 1997 to 2006 (Chart 2).
Energy resource wealth, which surpassed the value of timber wealth in 2000, was the chief factor in the increase in total resource wealth.
In 2006, energy resources accounted for 57% of total resource wealth, followed by timber (24%) and mineral resources (19%). For much of the decade, natural resource wealth increased rapidly, with resource prices playing a substantial role in the expansion of the wealth.
Unless set by regulatory agencies or organizations, the price of any good or resource is typically determined by supply and demand. The supply of natural resources is usually fixed in the short-term. In the long-term, however, the supply is affected by a number of factors including changes in resource prices, advancement of extraction technologies as well as discoveries of new deposits and depletion of resources.
On the other hand, demand for most natural resources is variable in both the short and long run, being affected by fluctuations in domestic and global economic factors. When resource demand rises in the short term, constraints on short-term supply can mean sharp increases in prices. This effect can be seen in the price index of natural resources (Chart 3), which has been volatile over the past decade, mainly due to fluctuating demand.
On average, the all-items natural resource price index grew more than 9% per year from 1997 to 2006. Declines in resource prices3 in 1998 and 2002 were related to the 1997/98 East Asian financial crisis, and the terrorist attack of September 11, 2001, which triggered slowdowns in the global economy. 4,5
What you should know about charts 3, 4 and 5
The resource price index shown in Chart 3 is much like the consumers price index (CPI). It provides a measure of the overall price change for the bundle of resources considered in this analysis. Since the prices for these natural resources vary independently and are based on very different units of measure (cubic meters for oil, kilograms for gold), to get an overall measure of price change for the bundle a weighted average of their respective price changes is constructed. Various weighted averages are possible but for this study the Chain Fisher Index formula is used for the indexes in Charts 3, 4 and 5.
The resource price indexes in Chart 3 weight the price changes for the various resources by their share in the total value of resource production. Chart 4 presents the natural resource reserve index, which weights the changes in physical volumes of various reserves using their share in the total value of natural resource wealth. The extraction cost indexes in Chart 5 average the changes in extraction costs of the various resources by weighting them according to their share in total extraction cost for these resources.
Between 2002 and 2006, the price index of natural resources increased rapidly. In recent years, the real GDP of India and China, the world’s two most populated countries, grew more than 8% a year.6 These countries are both large importers of natural resources. In particular, China’s demand for industrial raw materials has pushed up world energy and metal prices.7
Volatility in the energy resource price index was the main factor for the volatility in the all-items resource price index (Chart 3). During the last decade, the energy resource price index grew on average by 12% per year, followed by minerals (7%) and timber (2%).
Overall, the all-items natural resource reserve index remained relatively stable from 1997 to 2006 (Chart 4). This means that changes in the size of Canada’s natural resource reserves had nearly no effect on the growth in natural resource wealth in Canada from 1997 to 2006. Although the all-items reserve index had gradually declined in the early 2000s, the index rebounded in 2005. Reserve size can change for several reasons including changes in resource prices, changes in extraction costs, advancement in extraction technologies, discoveries of new deposits and depletion of resources.
When prices increase, businesses not only boost production to earn profits but also invest more in exploration and drilling activities. This may result in the discovery of new deposits. Also, with increased prices, previously known but unprofitable resources may become profitable to extract, which in turn increases the size of the economically recoverable reserve.
For example, production of offshore oil and gas and diamonds, which were discovered in the late 1970s and early 1990s respectively, only began in the late 1990s as extraction became economically and technologically feasible.8,9 These resources helped in maintaining the level of the all-items reserve index.
Although the all-items reserve index was relatively stable, the reserves of energy and mineral resources were quite volatile. The gain in energy reserve index was partly offset by the decline in the mineral reserve index. In 1998, the addition of offshore oil and gas, and a significant increase in crude bitumen (oil sands) reserves raised the energy-reserve index to 118. On the other hand, the mineral reserve index dropped to 78 partly due to a substantial drop in iron ore reserves. The timber reserve index slightly declined over the years, and stood at 97 at the end of the period.
Businesses may need to employ more people and invest a substantial amount of money on advanced technologies to extract resources that are located in relatively remote locations and are expensive to extract. The cost of maintaining this additional investment, also called fixed costs, remains the same even when the production drops.
Overall, extraction costs grew more quickly between 2003 and 2006 than during the previous six years, averaging more than 13% per year. Canada’s tight labour market is partly responsible for this increased cost. In 2006 the overall unemployment rate was 6.3%, the lowest level in over three decades, while the unemployment rate in resource-rich Alberta was 3.4%.11
From 2003 to 2006, employment in mining and oil and gas extraction industries grew on average by 10.5% per year, while weekly employee earnings grew by 4.4% per year.12 This growth in employment and earnings has pushed up the total labour costs. In recent years, both the energy and mineral extraction cost indexes grew rapidly, while the timber harvesting cost index declined.
Canada is rich in natural resources. This wealth is an important source of current as well as future incomes. By generating wealth, natural resource reserves play a significant role in sustaining present as well as future economic activities. Natural resource wealth depends on a number of factors including the size of physical resource reserves as well as resource prices. Fuelled by increases in resource prices, natural resource wealth grew, on average, by 10% per year during the last decade. In 2005, Canada’s natural resource wealth crossed the trillion dollar mark.