The Accidental Superpower

by Peter Zeihan

  This all assumes, however, that as a country Canada can hold it together. And that is no longer assured.

  The Quebec Question: Asked and Answered

  The perennial challenge to Canadian national stability ever since its inception has been the Quebec question.

  Canada’s largest concern mounts not specifically from demographics or markets or finance, but from the political outcome of its fractured geography. The country’s founders realized that the sort of unitary government that exists in France or Russia could never work in Canada. The citizens of Halifax simply had so few points of contact in their daily lives with the central government in Ottawa—much less Toronto, Winnipeg, or Victoria—that it made no sense to have strong centralization. The result was a confederal model of government in which most decisions not linked to defense or foreign affairs are made at the provincial rather than the national level.2 In many ways, the Canadian government has operated in a manner similar to the United States during the Articles of Confederation. Canada is one of very few advanced countries never to have federalized into a system where the national capital has at least as much power—if not more—than the provincial/state capitals.

  Initially, the primary political logic for this setup was the French Empire in North America. The British conquered French Quebec in 1760, giving them control over a population from a rival political, cultural, economic, and linguistic system. In order to minimize the transition pains, the English authorities decided to allow Francophone Quebec largely to manage its own affairs, setting the pattern of region-center relations in what eventually became Canada. Now, 240 years after the conquest of Quebec and 140 years after the British Empire granted Canada its independence, confederalism and provincial supremacy are inseparable strands of Canadian political life. Canadian courts have ruled that Canada’s provinces have full legal right to hold independence referenda.3

  In fact, the Canadian Supreme Court decided in favor of the legality of secession in its unanimous decision of August 20, 1998:

  A clear majority vote in Quebec on a clear question in favour of secession would confer democratic legitimacy on the secession initiative which all of the other participants in Confederation would have to recognize.… The other provinces and the federal government would have no basis to deny the right of the government of Quebec to pursue secession should a clear majority of the people of Quebec choose that goal, so long as in doing so, Quebec respects the rights of others. The negotiations that followed such a vote would address the potential act of secession as well as its possible terms should in fact secession proceed.

  Should Quebec ever capitalize on this ruling and secede—the vote in the 1995 secession referendum came within a few percentage points of that happening—it would be the end of the Canadian state. Quebec controls all of the non-U.S. transport connections between Canada’s most populous province, Ontario, and the Atlantic basin. To avoid destitution, the Maritime provinces would have no choice but to seek accession to the United States, and rump Canada would still be fractured into three pieces that have little to do with one another. The possibility of Quebecois separatism has long been a real and present danger to the very existence of the Canadian state.

  Ottawa treated the Quebecois secession issue with the seriousness that it deserved, and in the closing decades of the twentieth century it struck upon an effective strategy for containing the threat. The Canadian national government set up a sizable fiscal transfer system that shifted money from the Ontario core to the Quebec regional government, in essence bribing Quebec to remain part of united Canada. It was an expensive solution, but manageable.

  For all practical purposes, the Quebecois secession movement is now dead. Quebecois provincial mismanagement has now been entrenched for so long and the fiscal transfers from Ontario so ingrained in the system that industrial and corporate activity have vacated Quebec en masse. Should Quebec declare independence now, its currency would become soft, its finances would evaporate, and its ability to maintain its own infrastructure would devolve within a generation. It would very quickly become a Detroit without an automotive industry. Any serious Quebecois politician knows this, and over the course of the past decade Quebec’s independence drive has become far less boisterous and aggressive (culminating with Bloc Quebecois’ near eviction from the national parliament in the 2011 national elections). As a result, the Quebecois independence movement has now dwindled to little more than an (incredibly successful) effort to wring more transfer funds out of Ottawa.

  All actions, however, have unintended consequences. Quebec couldn’t simply state a number that would keep it in the Canadian system and expect to be bribed. It had to go through the motions of actually seceding. Part of this process involved not just the independence referenda, but also nudging the national government to prepare for such independence, ergo the Supreme Court ruling on the topic’s constitutionality. Canada’s parliament even passed a “Clarity Act” in 2000 to lay out the political process of implementing the court’s decision. The mechanics of Quebec’s efforts have inadvertently established just what any Canadian province would need to do to achieve independence.

  Whether it was the result of true nationalist passions or simply a shrewd negotiating strategy, Quebec paved the road to secession, even if it has now decided that it no longer has any intention of traveling that road. So the answer may be a little awkward, but the Quebec question is answered. Quebec will not secede and so the question won’t kill Canada.

  But another—more deadly—question is rising rapidly to take its place.

  The Alberta Question: Not Yet Asked, Already Answered

  The Ontario-Quebec compact has successfully contained Quebecois separatism, but it has come at a considerable financial cost. $16.1 billion was the cost of keeping Quebec quiescent in 2013. Ontario has been able to produce this volume of money with some difficulty, but 13.5 million Ontarians paying for only 8 million Quebecois is achievable (if not enjoyable).

  Or at least it was. Ontario—just like Canada on the whole—is rapidly aging. Within a few short years, masses of mature Ontarian workers—just like mature Canadian workers on the whole—will retire. That will drastically reduce the Canadian national government’s ability to source compact money from Ontario. Making matters worse, Quebec’s populace is actually getting older faster than Ontario’s, so the cost of the compact is likely to increase in the years to come. Nor will the other Canadian provinces be able to bridge the gap. Quebec isn’t alone in its rapid and advanced aging: Quebec-style demographics are reflected in British Columbia, Yukon, Nova Scotia, Prince Edward Island, New Brunswick, and Newfoundland. The populations of Manitoba and Saskatchewan are somewhat younger than Ontario’s, but collectively they comprise only 2.2 million people—together only one-quarter that of Quebec. Their impact upon the national fiscal calculus is minimal.

  Not so for Alberta. The Albertan energy boom is now well into its second decade. It has proven so successful and so deep that Alberta now enjoys the second highest income of any province anywhere in the Western world.4 Its wealth is now so high compared to its fellow provinces that as of 2012 it became the only Canadian province that is a net contributor to the national budget with a net pay-in of over $16 billion. As of 2013, that takes an average of $6,000 annually out of the pocket of every Albertan. As Canada’s—and Ontario’s and Quebec’s—population continues to age, a far worse than disproportionate share of the compact’s cost will be loaded into the Albertans’ national tax bill.

  And it gets worse. A lot worse. Demographically, Alberta is the anti-Canada. Largely because of the province’s exploding energy sector, it is attracting masses of young people from across Canada (and the world), actually reducing the province’s average age even as it raises the labor pool’s skill levels. Nearly unique in the contemporary Western experience, Alberta’s population is getting younger, more highly skilled, and better paid. As the demographic and financial disconnect between Alberta and the rest of Canada grows, these y
ounger, more highly skilled, and better-paid Albertans will be forced to pay ever higher volumes of taxes to Ottawa to compensate for increasingly older, less skilled, and lower-income Canadians elsewhere in the country. Plagued by rafts of elderly Canadians who are no longer paying into the system but instead drawing out, the net per capita Albertan tax bill is likely to breach $20,000 by 2020.

  And it gets worse. As Canada ages, its currency strengthens. Mature workers—to say nothing of retirees—consume less. However, mature workers tend to be more productive than young workers. Lower consumption plus higher output results in higher exports. A sustained period of higher exports and lower consumption puts continual upward pressure on the Canadian currency. The slow and steady march higher of the Canadian dollar versus other major currencies of the past decade—from $0.65 in 2003 to $1.05 in 2013—is largely a result of the shift in Canada’s current account brought about by its aging demography.

  There are many pros and cons to a stronger currency, but for Alberta the impact is almost wholly negative. Like all commodities, oil, natural gas, and grains are all USD-denominated. So all of Alberta’s exports are in U.S. dollars, most of its incoming investment is in U.S. dollars, but most of its expenses—and especially its tax bill—are in Canadian dollars. A strong (and strengthening) Canadian dollar squeezes not just Albertan income, but Alberta’s investment plans (and from it future income) as well. In absolute terms, Albertan energy income may have increased drastically over the past decade due to rises in energy prices and increased output, but its per-barrel profit in Canadian dollars has actually dropped by over 40 percent since 2003.

  And it gets worse. America’s shale revolution is drastically increasing American oil output, but not in a geographically dispersed way. Nearly all of the producing shale fields are east of the Rockies and west of the Appalachians. One of the many outcomes of this geographic concentration is that there is now a sizable arbitrage between energy prices in the interior of the country and those of the coasts. In the case of oil, there is typically a $10–$15 per barrel spread between the American interior and the Gulf coast.

  Yet nearly all Albertan oil flows via pipeline into the American Midwest, an area surrounded by major shale basins in North Dakota, Colorado, Texas, Oklahoma, Michigan, Ohio, and Pennsylvania. Put simply, Alberta is selling its energy into the United States’ most saturated and most competitive market, forcing it to be sold at a discount of $20 to $40 a barrel compared to the international average. And that’s the good news. Albertan natural gas—unlike American shale natural gas—is not a waste product. It is simply not price-competitive in American markets anymore and so the bulk of the subsector faces drastic drawdowns if not outright closure.

  To date, landlocked Alberta’s efforts to reach non-American markets have failed utterly. Its effort to participate in a pipeline project that would ship some of its crude directly to the U.S. Gulf Coast (Keystone) has become snarled in U.S. domestic politics. Its attempts to build a similar export infrastructure to the Pacific coast have proven even less successful. The political debate in British Columbia—the Canadian province through which Albertan energy would have to flow—is between those who wish to shut down the Albertan energy complex and those who would charge so much for transit rights that British Columbia would gain more income from Albertan energy production than Alberta itself.

  And it isn’t just Albertan energy that faces a troubled future. Alberta is also part of the Canadian grain belt. Just like oil and natural gas, wheat and barley are also USD-denominated commodities. Here transport puts Alberta in a double bind. The closest obvious market for Albertan foodstuffs is the United States, but the United States is the world’s largest grain producer, making sales opportunities few and far between. Then, Alberta is landlocked and lacks access to any navigable waterways, so it must rail its grain at considerable expense either around or through the Rockies to British Columbian ports, or send it south through the United States to New Orleans. Once on the ocean, Albertan grain then has to sail all the way around the world to find a sure market. American grain tends to capture most of the South American and East Asian markets, while grain from Europe and the former Soviet Union dominates African and Middle Eastern markets. Albertan grain has to settle for South Asia, and even that market depends on whether South Asians have a good harvest. Alberta—in good times—is already the bottom feeder in international grain markets. Add in a strengthening currency, and Albertan agriculture may well cease to be economically viable. That would limit the province to an energy-only economy.

  And it gets worse. Perhaps the most damning angle of the emerging Alberta Question is that, at present, Alberta doesn’t get much of a say in what happens. Keystone is a purely American decision. British Columbia’s extortion is a completely B.C. decision. Alberta’s tax rate is a completely Ontarian and Quebecois decision: Ontarians and Quebecois together outnumber Albertans by five to one, more than enough to impose a decision on Edmonton without even preliminary consultation.

  This should not come as a shock, but as of this writing there are very few issues that Edmonton and Ottawa agree on, with the two capitals regularly sparring over everything from nuclear power to carbon policy to labor regulations to health policy to pensions to tax levels. What most fail to realize—and I’m not limiting this assessment to non-Canadians—is that Alberta-Ottawa relations in 2014 are the best they can be expected to be for decades. Not only will Albertans become younger, more skilled, more economically dynamic, and less connected to broader Canada as the years roll by, but the current national government is from Alberta, up to and including Prime Minister Stephen Harper. It is the Albertan-originated Conservatives who have run the national government since 2006, working tirelessly to limit the growth of the Canadian government and its pension outlays, blunt the financial impact upon Alberta, and give Alberta as large a voice in Canadian decision making as possible. It is on the Conservatives’ watch that Alberta became the only payer into the Canadian system and was put on the track to injecting exorbitant volumes into a system that they cannot influence. One can only imagine how Alberta’s fiscal position will deteriorate when its chosen sons and daughters are no longer calling the shots in Ottawa.

  The core issue is pretty simple. While the Quebecois—and to a slightly lesser degree the rest of Canada—now need Alberta to maintain their standard of living, the Albertans now need not to be a part of Canada in order to maintain theirs.

  So why not just declare independence and be done with it? Well, there’s a complication.

  The American Option

  While Alberta would do much better if it were not part of Canada, it would not do better as an independent country. If it were an independent entity, Alberta’s currency, driven by energy exports, would skyrocket to the point that its agricultural sector would quickly lead all other nonenergy sectors to collapse. An independent Alberta would be a sort of cold-temperate Kuwait, in which the lives of all of its citizens would revolve around a single sector while everything else simply withered away, to be replaced by imports. Outright independence would also not solve any of Alberta’s energy transport problems; it would still be at the mercy of American—and, God help them, infuriated Canadian—domestic politics.

  That only leaves one option: union with the United States.

  While it is politically easier said than done, so many of Alberta’s mounting economic, financial, currency, and even political problems would not only be solved but also flipped into competitive advantages should it accede to the United States.

  • Merger with the U.S. system would alleviate much of Alberta’s labor shortage issues. Currently the vast rafts of un(der)skilled Canadians who relocate to Alberta have to be trained in petroleum engineering. The United States, in contrast, already boasts the world’s largest petroleum complex.

  • Albertan grain grown within the American system would have privileged access to the American market and transport network when compared to Canadian grains, so the Albertan agricul
tural sector would not go the same way as Canadian agriculture.

  • Statehood would grant unrestricted and unlimited access to the world’s deepest and most stable capital markets, thus guaranteeing all the investment capital Alberta could ever need.

  • Infrastructure projects like the Keystone Pipeline would no longer be international agreements, but instead domestic developments.5 Interests in other U.S. states would lose the ability to block them, giving Albertan energy the ability to reach the broader global market, likely increasing the selling price of Albertan energy by a third.

  • Canadian taxes on incoming investment would simply evaporate and American investment dollars could pour into Alberta as easily as they could into North Dakota or Texas.

  • While Alberta as a U.S. state would still have a higher per capita tax bill than its new conationals, it would not be an outlier as it is in Canada. There are eight U.S. states spanning across American regions that have per capita incomes of $60,000 or more.6 Alberta would still be the richest state (and like in Canada its per capita income would be about 50 percent higher than the national average), but American tax policy would not be singling it out.

  • The only people besides NAFTA members who have more open access to America’s consumer market are the constituent parts of the United States itself; in a world in which market access will be nearly everything, that’s an advantage that is impossible to ignore.