Richard Foot, Canwest News Service

Just when the party is under way in Saskatchewan and Newfoundland — when, after decades of hard times and “have not” status, the money is finally rolling in and business is booming — along come the killjoy economists with a sobering message.

Beware, they say, the “curse of natural resources,” a potentially debilitating affliction that has wreaked havoc on other booming, resource-based economies.

Soaring commodity prices are pushing Saskatchewan and Newfoundland and Labrador to the forefront of economic growth in Canada, along with Alberta, at time when other parts of the country, particularly the manufacturing heartland of Ontario, are tilting toward recession.

Resource extraction companies are investing billions on the Prairies and the Grand Banks to expand production of oil, potash, uranium, coal and other minerals, and provincial coffers in each province are bulging with resource royalties.

“There are a lot of people that are riding very high today in Saskatchewan and Newfoundland. I’m delighted for them, but I’m skeptical how sustainable this is in the long term,” says Brian Lee Crowley, president of the Atlantic Institute for Market Studies, an economic think-tank.

Mr. Crowley and other economists warn that sudden natural resource wealth can be a curse in disguise. Among its problems is Dutch disease, a term coined in the 1970s after newly discovered North Sea oil and gas flooded the Dutch economy with money — pumping up its currency, inflating prices, killing traditional exports and prompting years of rampant unemployment.

Britain, Venezuela and Louisiana have been hit by the same phenomenon in recent history. It’s affecting Russia today, and with the high Canadian dollar and manufacturing malaise, some believe this country is starting to feel its ill-effects.

In June, the Paris-based Organization for Economic Co-operation and Development, urged the federal government and Alberta to take excess revenues from the oil boom — generated by taxes and royalties — and invest them outside the country in sovereign funds that would not only save the money for the future, but remove the cash and its inflationary pressures from the domestic economy.

That’s how Norway handles its North Sea oil and gas windfalls. For 17 years, Norway has socked away all but four per cent of its government petroleum revenues in a fund that now totals nearly $400 billion, one of the largest investment funds on the planet.

No withdrawals from the fund are allowed until after the oil is gone, and all of the cash is invested outside the country. Meanwhile, Norway’s non-oil, export economy thrives alongside its petroleum industry.

The federal and Alberta governments have rejected this strategy. Alberta makes only occasional deposits into its $17-billion Heritage Fund, according to the Canada West Foundation, preferring to use its oil wealth to keep taxes low and build infrastructure.

The curse can manifest itself in other ways.

“You don’t want extraction commodities to be the sole provider of prosperity,” says Brett Gartner, an economist with the Canada West Foundation. “The risk is that when things are going well, the whole push to innovate and to diversify the economy gets forgotten, crowded out by all the money being made off resources.”

Resource wealth can also create a society so accustomed to easy affluence — think Saudi Arabia — that governments become surrounded by supplicants and demands for social welfare, and people are distracted from bolstering the conventional economy.

“No one worked for those natural resources,” says Mr. Crowley. “They were put there, under the Earth’s crust, by accident in your jurisdiction. The value that’s created from them comes, in the case of oil, from companies putting a hole in the ground, sucking it out, and simply writing the state a cheque.

“These vast resource revenues become a curse, because people say to governments, ‘Why would I work? The money’s already there, you just won’t give it to me.’ It creates all kinds of incredibly difficult political conditions.”

Newfoundland and Saskatchewan are likely years away from putting large amounts of their resource wealth into a heritage fund. Each has a provincial debt to pay off — in Newfoundland’s case, the largest per capita debt in the country. And each has gaping infrastructure needs.

But Brian Peckford, the former Newfoundland premier who helped lay the groundwork for his province’s offshore industry, says the two provinces should begin a “grand conversation” with their people to properly explain these issues and discuss how best to spend or save resource revenues.

In Newfoundland, “there are very high expectations, now that everyone knows what the dollars are,” Mr. Peckford says. “The demands on the treasury are going to be overwhelming.”

And what happens when the resources run out? Or the demand for oil is replaced by cleaner, renewable sources of energy? Or the price of potash tumbles?

“We’re not naive,” Newfoundland Premier Danny Williams told a group of St. John’s oil executives in June. “We know that our petroleum resources are finite and that one day they will run out.”

Yet there are strong feelings in both provinces that the golden goose will remain for several years to come, fuelled by the needs of China, India and Indonesia.

“Unless there’s some sort of catastrophic worldwide meltdown, the demand for resources will not fall dramatically and Saskatchewan will continue to benefit from that,” says Mr. Gartner. Of course, there will be ups and downs, but the long-term prospects are good.”

There’s also optimism that greater resources await discovery. Newfoundland has already pumped more than 30 per cent of the oil reserves at its existing offshore projects, including the still-untapped Hebron field. Jerry Byrne, a respected St. John’s businessman whose firm builds hardware for the offshore, says there are “elephant-sized fields yet to be found, in gas as well as oil. We have enormous potential.”

Wade Locke, an economist at Memorial University, says no matter how big the oil resources in either province, demand could suffer as high prices intensify the search for alternatives, or environmental pressures lead to a carbon tax that could effectively kill the oil boom in Canada.

He says the best way for any commodity producing province to secure its prosperity is to develop resource-related expertise and technology. Once the resource revenues themselves run out, provinces can attract wealth with knowledge.

Already there are signs of this. Saskatoon is becoming world-renowned as a centre of mining-engineering expertise. Industry in St. John’s has developed the world’s best technology for operating in harsh ocean environments — including coping with icebergs — knowledge certain to be in demand as the scramble for Arctic resources opens up.

Mr. Locke says more investment is needed. “In spite of what we think we are in Canada, we remain exploiters of raw natural resources,” he says. “Which is fine, as long as we remain high-quality exploiters. We just don’t put enough in Canada into research and development of resources.”

Doug Maurer, who manages oil operations in southern Saskatchewan for Petrobank Energy, says he believes the industry there will flourish for at least another 10 to 20 years, “even if there’s a pullback in demand and prices.”