Resetting the Alberta Economy

The Alberta economy is in bad shape. Wave after wave of bad news has put the province in very deep trouble.

  • The recession of 2015-16 dealt a serious blow to the economy and government’s fiscal situation. The recovery has been slow and tenuous.
  • The federal government’s four-year assault on the energy industry in the name of climate change saw foreign companies dump $37 billion in Canadian assets.
  • Delayed approvals and cancelled pipelines stymied industry. Notable Canadian companies like TransCanada and Enbridge moved investment south of the border. Teck Resources withdrew its proposal for an oilsands plant worth $8 billion in the face of Liberal caucus resistance.
  • The COVID-19 pandemic requires extensive public investment from the provincial government.  The government budget anticipated a deficit of $6.8 billion in 2020 and a small deficit the next year.  But COVID-19 will change both revenue and expenditures. 
  • The OPEC price war is meant to drive North American production out of the marketplace.  And Canadian producers are hit very hard. Conventional oil is selling for about $20 a barrel and bitumen based heavy oil has fallen as low as $4 per barrel, making it cheaper than a glass of beer!
  • Alberta continues to produce record amounts of heavy oil.  This supply overwhelms pipeline capacity and has resulted in significant price declines in a constrained market. The Alberta government reduced export permits to 3.8 million barrels per day in an effort to preserve the value of the resource.
  • The pandemic caused a global economic slowdown further destroying demand for oil.

A recent TD bank forecast concludes that the Alberta government deficit for the year might be closer to $12 billion. Roughly $5 billion greater than forecast. The news on unemployment is also glum – estimated to be about 8% for the next two years. The budget’s assumption of an oil price of $58/ barrel is wildly out of whack with today’s marketplace. A decline of 5% of GDP is forecast for this year.

Facing this disastrous situation, the Premier established an Economic Recovery Council chaired by economist Jack Mintz and with a notable member, Stephen Harper.  The task is to provide advice and insight to government during this crisis.

This panel must do more than offer up a few bon mots of conservative economic orthodoxy.  For 20 years the Alberta economy has had the ailment called Dutch Disease.  This ‘economic disease’ occurs when one export sector of the economy booms and crowds out other sectors.  It causes the value of the currency to rise and reduces the competitiveness of other sectors.  Wage inflation can result, and royalty revenue grows rapidly. In Alberta we have become accustomed to using oil royalties to pay for services. But then – when the resource or markets are depleted, the disease wreaks havoc on its victims.

Desperate time calls or desperate measures! Perhaps the first advice of the panel is for the UCP government to purchase $1.5 billion in stock from the pipeline company TC Energy (TransCanada) along with a follow up loan guarantee of $6.0 billion.  The purpose of the investment is to get the Keystone XL pipeline built to move oil from Alberta to the US Gulf Coast. 

The big challenge facing Alberta is how to rethink our economic strategy.  

The UCP’s approach of laissez-faire, low corporate taxes, low regulatory barriers have failed to overcome the economic headwinds that overwhelm the province. And the UCP’s bet that there is one more boom in oil, is high risk. That strategy has been a significant contributor to Alberta’s chronic deficits.

Severely Normal Albertan might wonder if it is time to retire the old mantras and have government become active at stimulating more diverse economic growth. The open question is what, if any, plans might the panel propose for other sectors and tackling Alberta’s other disease.