Although Alberta’s oil-fuelled economy is on fire, storm clouds are on the horizon
Dec. 11, 2006. 06:44 AM, DAVID OLIVE, Toronto Star
“The oil sands clearly have a treasured place,” said OPEC president Edmund Daukoru during an October visit to Calgary. With reserves second only to Saudi Arabia’s in size, you had the feeling Daukoru was angling for Wild Rose Country to sign up for membership in the oil cartel.
A treasured place, that’s Alberta. Or is it?
After recent years of soaring prices for oil and gas, Alberta lives in the imagination of many Canadians outside the province as a nirvana of exceptional prosperity that befits the only “have” province besides Ontario, but without Ontario’s punishing energy costs and its loss of tens of thousands of manufacturing jobs.
But Albertans see their province somewhat differently.
They endure an inflation rate — currently 3.7 per cent — that’s about five times higher than the national average. In Calgary, Edmonton and many smaller centres, prices for houses — if you can find one — are astronomical, and apartment vacancies are near zero. Traffic congestion in the principal cities can be a nightmare. A province-wide skills shortage can make a wait for a plumber or electrician endless, even in Lethbridge — about as far away from the northern oil boomtown of Fort McMurray as you can get without sticking a toe into Montana.
Incoming Tory premier Ed Stelmach, 55, inherits an overheated economy where cost overruns on existing and planned energy megaprojects have become so commonplace that most resource developers are threatening to pull in their horns.
“Under the current economics and also the labour supply, the cost of construction, it is very difficult and it is very challenging to maintain the building,” says John Lau, CEO of Husky Energy Inc., which is having second thoughts about a costly new crude-oil upgrader for its Alberta oil-sands project.
The United States, which takes virtually all of Alberta’s oil exports, is facing an economic downturn next year that may put a crimp in oil demand. That would likely coincide with an upturn in supply as new oil and gas projects come onstream worldwide, spurred by the higher resource prices that have made those projects financially viable.
Prices for natural gas, upon which the Alberta treasury is far more reliant than oil, have dropped by as much as one-third this year. And oil prices have touched the low $50s (U.S.) this year, well down from last summer’s peak of $78. Many of Alberta’s most prominent economists are forecasting a return to deficits by decade’s end, as resource revenues prove inadequate to help finance what many critics of Ralph Klein consider to be runaway government spending during his twilight years as premier.
Perhaps only in the most free-market of provinces would Klein’s spending come under fire as spendthrift, given the continued painful legacy of a decade or more of neglect of basic infrastructure. There’s hardly a school district, university or major teaching hospital in the province not in desperate need of funding for maintenance, never mind flashy expansions. And there’s Alberta’s laggard progress in answering its own age-old call to invest its post-resource economy future with spending that boosts R&D and jump-starts businesses in tech and other non-resource sectors.
Local critics cavil that at some $1,500 per capita, Alberta’s 2006 capital spending budget is three times the national average. They don’t mention that Alberta significantly under-invested in transportation and social services for more than decade, particularly in the 1990s, when the all-important oil and gas sector was in the doldrums with world oil prices as low as $9 (U.S.) in 1998-99.
Even when Edmonton finally re-opened the spending spigots in recent years, the new investment did not begin to keep pace with an economic boom in which Calgary’s population crossed the one-million threshold this year; and Fort McMurray, epicentre of the oil-sands frenzy, has doubled in population in the past decade.
At the Southern Alberta Institute of Technology (SAIT), one of the most important skills-training centres in Western Canada, administrators are begging for $84 million to fix leaky roofs and make other basic repairs. Edmonton mayor Stephen Mandel complains of an “infrastructure deficit” of as much as $4.5 billion. Alberta’s new Children’s Hospital already is overcrowded, as is Calgary’s light-rail transit system. Last month, the mayor of the Regional Municipality of Wood Buffalo demanded that Alberta’s energy regulator delay a planned $6.5 billion oil-sands venture until Edmonton commits to alleviating the anticipated burden on schools, roads, hospitals and other basic services in her region.
For at least some Albertans, the conversion of “King Ralph” into a sugar daddy late in his 14-year tenure was long overdue. After all, and of necessity, Klein had long focused on austerity in order to wipe out the $3 billion annual deficit inherited from profligate predecessor Don Getty.
After the painful Klein years of hospital closings, billions of dollars in cuts to government spending, and a 26 per cent reduction in the provincial civil service, the premier’s relatively recent turnabout in hiking government spending by about 50 per cent over the past five years seemed an appropriate response to overdue improvements to the province’s education, healthcare and transportation infrastructure. Particularly given the influx of immigrants seeking $90,000-a-year construction jobs whose families have rapidly swollen the population.
Alberta may boast the nation’s highest per capita incomes, but its high standard of living exacts a price even on the prosperous, and is not equally shared in a province with a widening gap between rich and poor.
“Increasing stress levels of Albertans due to work demands and financial challenges are evidenced by increased rates of obesity, problem gambling and suicide,” reports Pembina Institute, a Calgary-based think tank. Pembina researchers also note that Alberta ranks last among provinces in supporting assistance to welfare recipients.
There’s no silver bullet for meeting these social and economic challenges, which Stelmach is philosophically inclined to confront from a fiscally conservative perspective. The 13th Alberta premier, and the first of Ukrainian descent, held two cabinet posts in the Klein government while continuing to run his family farm in tiny Andrew, Alta. The well-regarded, folksy premier-designate, nicknamed “Steady Eddy” for his soft-spoken demeanor and aversion to bold moves, is most famous for the sculpture of the world’s largest mallard duck adorning the roadside of his farm.
No surprise, Stelmach now is being showered with advice, much of it along neo-conservative lines. The Alberta Chambers of Commerce, the provincial chapter of the Certified General Accountants Association and many of the province’s top economists have warned Stelmach to rein in spending or risk crippling deficits.
The opposition Liberals are preaching austerity. And Stelmach owes his upset leadership victory over perceived front-runner Jim Dinning, a successful finance minister in the Klein government, in part to the perception that Stelmach is more reluctant about loosening the provincial purse-strings.
Strikingly, there’s a near-silence among the province’s political leadership and its media punditry about Alberta’s “infrastructure deficit,” such is the preoccupation with staving off a new wave of deficits — a rather odd circumstance given Alberta’s debt-free status and the urgency for action that overcrowded hospitals and under-funded schools would prompt in most jurisdictions.
Indeed, the Idea of the Moment in Edmonton is to emulate Norway by sequestering the lion’s share, if not every penny, of resource wealth in a lock box much like Oslo’s decade-old, $170 billion Petroleum Fund, which greatly overshadows a diminutive Alberta Heritage Savings Trust Fund, created by then-premier Peter Lougheed in the 1970s. Since the mid-1970s, it’s estimated, only 8 per cent of the Alberta government’s oil and gas receipts have been earmarked for the Heritage Fund, the rest having been spent. Norway’s fund captures all such revenues, and invests most of them abroad, in order to diversify Norway’s wealth and hold down domestic inflation.
It appears that most leading Alberta economists have studied and passed favourably on the Norwegian model. And that few if any of them have visited Norway to determine how that model is regarded locally. Norway suffers one of the industrialized world’s highest costs of living. A pizza delivery will set you back $40, a gin and tonic $17, and a litre of gasoline about $6. Reports of shortages of everything from police to school supplies are common. A KPMG survey in 2005 found that when disposable income was adjusted for cost of living, Norwegians were the second-poorest people in Europe, besting only the Danes.
A debate rages in Oslo over putting the Petroleum Fund to better use, starting with investing the nest-egg domestically. “What we should do is spend some of our riches changing the tax system, investing in research and development, better education, infrastructure,” Siv Jensen, an opposition Progress Party legislator, told the New York Times last year.
There’s an argument to be made for not burdening future generations with today’s government spending. And there’s an argument to be made for burdening future generations with current investments that ensure they will have a decent society in which to live. The latter is supported by economist John Maynard Keynes’s famous observation that, “In the long run, we’re all dead.”
Stelmach may not have to choose between those starkly different options. Particularly in a world of volatile oil prices. Forecasters staring into the same crystal ball predict a sharp decline in world oil prices in 2007 or a handsome rise in same.
The only thing that passes for near-consensus is that you now seldom hear the projections common during the frothy market of last summer for $100 oil by year’s end or even by 2010.
For now, Stelmach might be best advised to simply freeze current levels of capital spending; to set a lower ceiling on the portion of oil and gas receipts that can be allocated to government spending (Klein did this in 2003, but then broke his own rule); and to allocate resource “rents” equally among spending, tax cuts and contributions to the Heritage Fund. (Another broken Klein pledge, of older vintage.)
And, following the example of the Caisse de depot et placement du Quebec, to invest at least a fraction of the Heritage Fund’s assets in promising biotech, telecom, environmental technology and other R&D-focused ventures outside the energy sector.
Governments face any number of special pleaders, but education makes an especially strong case. Todd Hirsch, chief economist at the Canada West Foundation, another Calgary think tank, suggested early this month that Edmonton focus its spending on education, from K-12 to adult literacy and apprenticeship programs, insisting that there’s no better way to ensure a productive, innovative economy down the road. It’s tough to argue that the evolution of Alberta into a 21st century “knowledge economy” doesn’t begin right there.
While Alberta’s resource bonanza may have helped trigger the rise in the loonie that has made life more difficult for Central Canadian exporters of manufactured goods, Alberta’s culpability has been conveniently exaggerated by firms that need to learn how to compete on value, not price.
The latest Alberta energy boom has actually been widely beneficial across Canada, from the resulting increase in Ottawa’s income-tax receipts, to the high-paying jobs at Ontario steel mills that turn out miles of pipe destined for the oilpatch, to decent wages for Prairie and Atlantic Canada émigrés who’ve been welcomed by Alberta employers.
Alberta’s continued prosperity, as measured in social wealth along with the material kind, is in the national interest. Albertans would hardly be alone in hoping that the legacy of the latest resource boom, looking back from the perspective of 2020, amounted to more than a spike in business at Calgary-area BMW dealerships.
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