After 50 years of trying to diversify its economy, Alberta is still stuck on oil
CALGARY — 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 said he’s 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. “When oil prices do rise, we need to stay focused and we need to recognize that as oil prices rise, all of our attention goes toward oil and gas. In my lifetime, I’ve seen that rodeo four times.”
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 points 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.
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, said Mary Moran, chief executive of Calgary Economic Diversification.
“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 plagued by a 25-per-cent 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. We’re going to have to fill that space with different people.”
I do believe the energy industry will not come back the way it has in the past
Calgary’s most ambitious attempt 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., even though Calgary offered to “fight a bear” for the company’s business.
Despite being spurned by Amazon, Alberta does have a track record of successfully stealing corporate headquarters from competing — some would say neighbouring — jurisdictions.
For example, Imperial Oil Ltd. in the 1990s relocated its headquarters to Calgary from Toronto. More recently, the province celebrated when diamond miner De Beers Group also moved its Canadian head office to Calgary from Toronto and when chemical giant BASF Corp. did the same thing.
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, though they also include Canadian Pacific Railway Ltd., Nova Chemicals Corp. and Shaw Communications Inc.
But as Kenney moves to restore the “Alberta Advantage” of low corporate and personal income taxes, the province isn’t alone in trying to attract investment. Ontario Premier Doug Ford has been touring the U.S. encouraging companies to open shop in his province.
More broadly, the fierce competition for Amazon’s second headquarters netted the company billions of dollars in tax breaks and showed how desperate cities are to attract big corporate tenants.
Kenney has linked economic diversification with his pledge to cut corporate taxes in the province 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 Canada West Foundation chief executive Martha Hall-Findlay.
Don’t expect unicorns to come from somewhere else
“Don’t expect unicorns to come from somewhere else,” she said, adding the province needs a stable, long-lasting approach to economic diversification if it’s going to be successful.
The Alberta government 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 University of Calgary School of Public Policy executive-in-residence, calls directly investing in companies or subsidizing industries — Alberta’s other historic strategy for diversifying its economy — the “forced growth” approach.
In his 2015 study called The Siren Song of Economic Diversification: Alberta’s Legacy of Loss, 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.
Among the money-losing decisions were giving money to NovaTel Inc. to locally manufacture cellphones, and disgraced former Edmonton Oilers owner Peter Pocklington’s meatpacking operation called Gainers and Magnesium Co. of Canada.
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.
“The incentive for the private sector is always to make money,” he said. “The incentive for politicians is always to have a trophy to hang on the wall for the next election.”
The incentive for the private sector is always to make money. The incentive for politicians is always to have a trophy to hang on the wall for the next election
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.
Despite previously being a PC minister, 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.
In the 1970s, Lougheed pursued a similar program to encourage the growth of an ethane-based petrochemical industry, which is now one of the largest manufacturing industries in the province and employs thousands of Albertans.
The petrochemical diversification program was one of Notley’s more popular economic programs and has been a success so far. Case in point, the Canadian Energy Research Institute rebranded the petrochemical conference it is hosting in June from “If you build it, they will come,” to “We’re building it. They’re here.”
On the campaign trail, Notley promised to supersize the petrochemical diversification program if elected and there is hope inside the energy industry and in policy circles that Kenney will keep the program alive as he signalled he would during the election campaign. At the time he told the Financial Post he didn’t want to “upset the apple cart” of petrochemical diversification.
“I would be surprised if (the UCP wound down the program) given that this was not a partisan thing and it looks like it’s attracting significant investment,” Hall-Findlay said.
“You never want a government to come in and throw stuff out just because it was a prior government’s idea. The message that sends to investors is a terrible message,” she said, adding that petrochemical diversification is one of the ways that Texas, still a major energy player, has reduced its reliance on upstream oil and gas prices.
Both Texas and Louisiana have offered a combination of low taxes and specific subsidies to petrochemical projects in recent years, and, fresh off winning projects from Inter Pipeline and Pembina, Alberta is likely to follow suit.
You never want a government to come in and throw stuff out just because it was a prior government’s idea
Albertans often compare the state of their province to Texas or Norway, jurisdictions that have better diversified their economies. There’s even a term for it in Alberta: “Norwailing,” which is the act of wailing about why the province isn’t more like Norway.
Adding insult to injury, Norway’s sovereign wealth fund has recently started selling off shares in oil companies to diversify its holdings as well as reduce its exposure to upstream oil and gas prices. The fund continues to hold shares in integrated oil companies, which are those with refining or downstream assets.
The sell-off caused the share prices of many Canadian oil companies to plunge at a time when many were already trading at all-time lows. It was also particularly irksome to Albertans because it was yet another sign of the Scandinavian country’s ability to weather an oil-price downturn and diversify, while the province faces another year of stagnant economic growth.