Calls to diversify economy grow stronger in Alberta
Sizable long-term deficit from pandemic among worries for stagnant province
For generations, all the way back to Peter Lougheed in the 1970s, Alberta has attempted to diversify its economy. But the fortunes of the oil and gas-producing province continue to rise and fall with energy prices.
Alberta Finance Minister Travis Toews will unveil the province's budget for the next year on Thursday, which is expected to once again depend heavily on rising energy prices.
Now there are growing calls for new taxes to broaden the government's revenue stream and address a sizable deficit racked up by pandemic health-care spending and other challenges in the economically stagnant province.
“We're gradually recovering but it doesn't change that the fiscal side is still a big challenge. It still means that there will be a sizable structural deficit in the long-term,” said Charles St-arnaud, chief economist with Alberta Central, a financial services firm.
Oil prices are expected to remain higher than previously expected over the next three years. DBRS Morningstar updated its oil and gas forecast Tuesday morning and now expects oil prices to average US$53 per barrel this year and US$52 per barrel in 2022 and 2023.
Oil and gas continues to be the biggest industry in Alberta, directly contributing to more than 16 per cent of the province's GDP. When related activity is counted, the Canadian Association of Petroleum Producers, the oil industry's main lobby group, says oil and gas supports “30 per cent of all economic activity in the province.”
For each of the last seven years, however, investment in the Canadian oil and gas industry has dropped sharply, from a peak of $46 billion in 2014 to a low-point of $15 billion last year, according to Calgary-based ARC Energy Research Institute.
Repeated attempts by successive governments to diversify through direct investment have been pricey experiments with minimal upsides. Lougheed's government made big bets in the '70s on the Magnesium Company of Canada and ill-fated cellphone manufacturing company Novatel.
A more recent example is the Northwest Refinery, built with Alberta government loan guarantees and a deal to supply the facility with provincially owned oil, which
cost $10.1 billion, or almost double its initial budget of $5.4 billion. The province's oil marketing commission now pegs the value of its agreement to use that refinery at negative $2.52 billion.
There have been a handful of winners, including investments that eventually turned into Edmonton-based Canadian Western
Bank. On a smaller scale, governments in the last 10 years have used credits and tax breaks to attract film producers — landing multiple seasons of the Netflix series Fargo — as well as tech companies, and to encourage the establishment of breweries and distilleries.
More recently, both the UCP and the previous NDP government have tried to encourage diversification within the energy sector itself, with petrochemical programs and proposed regulations to encourage oil and gas companies to repurpose old wells into geothermal wells.
“We've done a lot of new and important economic policy to drive diversification while ensuring a future for oil and gas,” said Alberta Premier Jason Kenney.
The UCP has also introduced a royalty framework for helium and a hydrogen strategy to make use of existing knowledge in the oil and
gas industry.
The programs have had mixed success, or have yet to fully launch. Meanwhile, the government's Bill 36, which would overhaul regulations for a potential geothermal industry, has yet to be declared into law.
An Alberta Energy Regulator spokesperson said only four oil and gas wells in the province have been converted to extract other commodities or sources of energy in the last five years.
There's strong evidence for change. A Feb. 17 study from the Business Council of Alberta shows swings in oil prices have actually produced more volatility for provincial budgets in the last 30 years.
The study showed that in the 1990s, the range between high and low years for the province's oil and gas revenues was $2.9 billion but “in each of the decades since, the variance has been greater than
$10 billion.”
The province has seen a $90-billion change in its balance sheet in the last dozen years, said Mike Holden, chief economist with the Business Council of Alberta.
Holden said the depth of the fiscal hole Alberta is facing requires both spending cuts and new taxes. He believes the “ground has softened” on a provincial sales tax because the last six years of economic stagnation have forced Albertans to confront a harsh reality.
He said the province could solve its revenue problems with a sales tax, which would raise $1 billion for each percentage point. So a five-per-cent HST in Alberta would plug a major hole in the province's budget.
“I think it's a conversation that we do have to have,” Holden said. “It's not this government's fault but they're the ones who are there now.”