By Mark Milke
and Lennie Kaplan
Canadian Energy Centre
We take a lot for granted. Consider the evolution in farming over the centuries.
Imagine being a farmer a century or more ago. You likely used animals or your muscle to move a plow to furrow the soil in preparation for planting the seeds. Perhaps you picked the harvest by hand.
We have some sense of how farmers worked generations ago, from stories and written accounts, and from paintings. Flemish artist Pieter Bruegel the Elder created one such work. His 1565 painting The Harvesters shows labourers gathering wheat and tying the stacks by hand.
That was nearly five centuries ago. Over the past two centuries since the Industrial Revolution – and over the past 100 years in particular – much farming worldwide moved from backbreaking labour for people and animals, to increased mechanization.
Farmers moved from plowing and harvesting fields using animals and their own labour, to tilling fields with mechanized vehicles such as tractors. That change, and many others, allowed for greater yield per hectare. That translated into less physical work but often more income, and much more food to sustain growing populations worldwide.
This is an example of the importance of labour productivity and capital investment in machinery.
There’s probably no greater disconnect between economists who talk about productivity and most people’s understanding of the concept. The farming revolution is a clear example of why that obscure economic concept matters: a much better life for all.
Or, as the Business Council of British Columbia describes it in more technical language, “a country’s standard of living ultimately depends on its labour productivity, that is, its ability to generate the highest possible level of income or output, per unit of labour input. …”
One of Canada’s most productive industries is the oil and gas sector. Despite energy price gyrations, the extraction sector has been an important contributor to Canada’s labour productivity over the past two decades – and, not coincidentally, to higher living standards for Canadians.
As the government of Alberta described it in 2016, “the key drivers of labour productivity include skills and human capital, capital investment, and innovation.” Specific to oil and gas, “levels in this capital-intensive industry are high as output (or GDP) per worker and per hour worked is high because this industry uses relatively more capital than labour in its production processes.”
Think of the farm example: 20 people cutting wheat and bundling it by hand have much less productivity per hour than 20 people driving tractors. The output per person, and per hour, is massively higher with the capital investment of one tractor per worker.
It’s the same in the oil and gas sector. All the capital investment – be it big vehicles in the oil sands or investments in technology to extract more oil and natural gas with less labour – is what leads to high per-hour outputs.
Labour productivity in the oil and gas extraction sector was worth $936 per hour in 2000, dropping to $402 per hour in 2012, and rising again to nearly $700 per hour in 2019, the most recent year available for this statistic.
Some subsectors in oil and gas extraction have lower productivity than that nearly $700 per hour and some higher. For example, pipeline transportation labour productivity was worth $414 per hour in 2019. Conventional oil and gas extraction productivity was measured at $514 per hour, with non-conventional extraction (the oil sands) at $1,090.
In comparison, the average labour productivity for all Canadian industries was much lower. In 2000, average labour productivity per hour for all industries was just $50 and just $60 per hour by 2019.
Here are some other Canadian industries and their labour productivity in 2019:
- mining ($196 per hour);
- telecommunications ($169);
- real estate ($149);
- finance and insurance ($77);
- motor vehicles ($75);
- aerospace products and parts ($68 per hour).
Some industries fell below the all-industry average of $60 per hour for productivity. They included:
- agriculture, forestry, fishing and hunting ($54);
- transportation and warehousing ($51);
- construction ($49);
- retail ($33);
- arts, entertainment and recreation ($28);
- accommodation and food services ($23 per hour).
Oil and gas extraction at $700 per hour in 2019 was nearly 12 times as productive as the all-industry average of $60 per hour.
That kind of productivity, much like the revolution in farming over centuries, can easily be taken for granted. But that would be a mistake.
While labour productivity is not an intuitively understood concept, it matters.
That’s because high labour productivity in oil and gas extraction has led to doing much more with less (your home is a lot easier to heat with natural gas than chopped wood), but also to significantly higher wages, higher investment by industry, more taxes and royalty revenues for governments, and much, much else that contributes to a higher standard of living for Canadians.
Mark Milke and Lennie Kaplan are with the Canadian Energy Centre, an Alberta government corporation funded in part by carbon taxes. They are authors of the report $60 vs. $700 per Hour: Labour Productivity in Oil and Gas Extraction Compared with Other Industries.
Mark and Lennie are among our Thought Leaders. For interview requests, click here.
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