Fight continues to diversify economy
After nearly 50 years, Alberta still wrestles to diversify its economy away from oil and gas
A popular bumper sticker in Alberta reads: “Please God, give me one more oil boom. I promise not to piss it all away next time.” But the saying is more than just tailgate reading. It can be found on T-shirts and is often said in living rooms during economic downturns and election cycles, including the most recent one that vaulted Jason Kenney and the United Conservatives to a majority government.
Albertans always hope for another oil boom along with rising global oil prices, and Kenney is promising to fight more forcefully for the province’s energy sector and new pipelines. But there is rising concern among economists, analysts and policy experts that the enthusiasm for diversifying the economy will wane as a result.
“Oil prices rising are good news for the treasury, but they can be a detracting factor in losing focus on diversification,” said Ken Kobly, chief executive of the Alberta Chambers of Commerce.
Kobly is frustrated that his province has, for decades, taken a start-and-stop approach to encouraging economic diversification. Alberta has a history of prioritizing diversification during recessions and losing patience when oil — and the provincial economy — rebounds.
“The frustration tends to mount when you hit another recession,” he said. “We need to recognize that as oil prices rise, all of our attention goes toward oil and gas.”
Despite nearly 50 years of diversification efforts, the province’s treasury is still dependent on non-renewable resource revenues for a balanced budget. This time around, however, as oil prices rise and a new premier takes office, the province can’t afford to take its foot off the pedal.
Every Alberta premier since the early 1970s has oscillated between two different approaches to encourage job growth in industries outside oil and gas. They have either directly invested in or subsidized specific industries — as Peter Lougheed, Don Getty and Rachel Notley tried — or cut corporate taxes in a bid to lure companies to relocate — as Ralph Klein did in the 1990s and Jason Kenney is promising to try again now.
Yet employment rates in Alberta still rise and fall with the price of oil and investment levels in the energy sector, as does the financial well-being of the economy in general. The province’s Heritage Fund — a savings account from oil and gas royalties — is smaller today in inflation-adjusted dollars than it was in the 1980s due to the province scaling back its savings beginning in 1987 and also because of spending during the Great Financial Crisis and a long-running downturn in oil prices.
It’s not lost on Albertans that Texas and Norway have had more success diversifying their economies and reducing their treasuries’ dependence on energy royalties.
A January 2018 report from the Dallas Federal Reserve pointed to growth in Texas’s financial and business services sectors as evidence of more employment outside of oil and gas. “The diversification of the Texas economy since the 1980s toward service-providing industries, together with greater linkages of financial and business services, likely helped insulate the Texas economy from the latest oil price drop,” the report noted.
Norway’s offshore oil production peaked in 1999 and has been steadily declining. However, it established a sovereign wealth fund with oil payments in 1990 — 14 years after Alberta established its savings fund — and has been adding to it since, effectively turning the country’s physical oil reserve assets into a financial asset worth more than US$1 trillion. The value of Alberta’s Heritage Fund was $17.6 billion at the end of 2018.
Alberta was hit significantly harder than Texas by the oil price collapse of 2014 and has not experienced an economic rebound, whereas Texas is enjoying a dramatic surge in oil production from the Permian basin.
Mary Moran, chief executive of Calgary Economic Diversification, said the province’s most recent recession is a result of a structural change in the energy market in addition to a cyclical downturn in oil prices. “I do believe the energy industry will not come back the way it has in the past,” she said, noting that the United States has been Alberta’s traditional oil and gas export market, but the country has been enjoying a historic boom of its own. “The global supply map changed forever during this structural change.”
Moran is not counting on an oil-and-gas industry rebound to refill Calgary’s empty office towers, currently suffering a 25-percent vacancy rate. Instead, she is looking to attract companies in agriculture, advanced technology and robotics in an attempt to remake the city into “the industrial innovation centre” for Canada.
“Energy companies have reduced their staff by more than half,” she said. “Many that I’ve talked to don’t believe they’ll be adding employees like they did in the last cycle.”
Calgary’s most ambitious bid to bring in an outside giant fell apart when Amazon.com Inc. opted to locate its second headquarters to a suburb of Washington, D.C.
Alberta does have a track record of stealing corporate headquarters from competing — some might say neighbouring — jurisdictions. More recently, the province celebrated when diamond miner De Beers Group also moved its Canadian head office to Calgary from Toronto as did chemical giant BASF Corp. Nevertheless, Toronto remains home to more than a fifth of the biggest 500 corporations in Canada, while Calgary has 68 of them, almost all of which are in energy.
Kenney has linked economic diversification with his pledge to cut corporate taxes to eight per cent from 12 per cent over the next four years. He has said the tax cut will entice companies outside the province to relocate, as will chopping other costs, regulatory timelines and bureaucratic red tape.
But lower corporate taxes don’t drive on their own economic diversification, said Martha Hall-Findlay, chief executive of the Canada West Foundation, a Calgary-based think tank. “Don’t expect unicorns to come from somewhere else,” she said, adding the province needs a stable, long-lasting approach to economic diversification.
Alberta has also attempted to build up homegrown industrial giants outside the energy sector, but its runaway success stories often involve investing in companies within the energy business.
Ted Morton, former provincial finance minister and current executive-in-residence at University of Calgary School of Public Policy, calls directly investing in companies or subsidizing industries — Alberta’s other historic strategy for diversifying its economy — the “forced growth” approach.
In a 2015 study, Morton noted that Peter Lougheed led the province into direct investments that eventually turned into massive winners, including Syncrude Canada Ltd., Alberta Energy Co. (now Encana Corp.), and the Bank of Alberta (now Canadian Western Bank). But the study shows both Lougheed and his successor Don Getty are also responsible for a string of bad investments that Morton called “the dirty dozen” and cost the treasury a total $2.2 billion.
There is also the potential for Albertan politicians to get out-negotiated by the private sector in rolling out incentives for companies through diversification programs. Specifically, Morton said, programs to encourage more refineries to be built are a trap the province has fallen into twice.
Morton said any successes the province has had in diversifying its economy have four things in common: They don’t introduce government competition to existing industries; they are viable without long-term subsidization; they are connected to a local advantage such as access to raw materials; and they use labour skills that already exist in the province.
Morton credits former NDP premier Rachel Notley’s petrochemical diversification program for clearing these four hurdles and believes it will eventually be a success, establishing a propane-to-plastics industry that previously didn’t exist in Alberta. Both Inter Pipeline Ltd. and Pembina Pipeline Corp. have already begun building propane-to-polypropylene facilities north of Edmonton. Other incentives for facilities that would use methane to produce methanol or acrylic acid were also announced before the election began in earnest.