-Roger Gibbins, Jacques Marcil and Robert Roach, Canada West Foundation
There is no denying that the Alberta economy is slowing.
Oil and natural gas prices have fallen and slumping bitumen prices combined with the global credit crunch have brought oil sands development to a near stop; conventional oil and gas exploration has contracted; in-migration is slowing; and the provincial government is looking at posting its first deficit since the 1990s. There are even several large holes in the ground in Calgary's inner city where cranes once stood ready to throw up another condo tower.
But this slowdown is different: there has been important structural change in the energy sector. Previously, swings in oil and gas prices were met by a relatively flexible energy sector: drilling could be postponed and production could be locked in until market conditions improved. Now, however, massive capital investments in the oil sands can only be sustained (or new projects approved) at a minimum price.
Conventional oil and gas production can slow down or speed up, but it is nearly impossible to fine-tune the capital expenditures associated with the oil sands. Although any decision to proceed with such developments rests on an assessment of potential energy prices over the project's 40 or 50-year lifespan, the current price of oil plays a significant role in those decisions.
The provincial economy has been running on overdrive, and now the inflationary cost pressures and labour shortages that have plagued it should abate somewhat, although they will not disappear. In this sense, the recession will provide welcome relief and the opportunity to plan for when the economy picks up again.
It should also be stressed that the western Canadian economy as a whole is not nearly as volatile as swings in commodity prices might suggest. Most wage earners are not employed in the resource sector, just as most wage earners in Ontario are not employed in the auto sector. Robust western urban economies, which began a period of sustained growth during the late 1990s when commodity prices were generally depressed, have proven to be relatively insulated from the irregular boom and bust cycles in those prices. While the provincial economies are shaken when resource markets go pear-shaped, they are not broken by irregular changes in commodity prices. The regional economy is now far more resilient than it was in the past.
In short, to focus on the price of oil, or on the price of any particular commodity, is to miss the western Canadian forest for the tree. That larger forest, with the unfortunate exception of the forestry industry itself, is more resilient and stable than commodity prices would suggest.
Nothing in the current recession will change the fact that the world's population will increase by almost two billion people in the next 20 years. The global recession will slow but not end the rapid pace of economic growth in developing countries. And, when it comes to potential Asian markets and investment, BC remains perched on the Asia-Pacific rim. In the simplest possible terms, the West produces food and energy, and the global demand for both will return and expand. While none of this guarantees a smooth ride for the western Canadian economy, it does provide grounds for optimism about the future.
There is no question that the current downturn has at least temporarily curtailed the westward shift of the national economy; the resource sectors based in the West have been hit, and hit hard. At the same time, there is also little question that continental and global demand for what the West has in abundance will return, just as it is certain that the competition faced by Canada's manufacturing sector will only intensify. At a time when any economic projection seems unwise in the extreme, the odds look good that two, five or ten years down the road, the westward shift will resume. Yes, booms go bust, but so too do busts eventually boom.
Drawn from the February 2009 issue of Policy Options, the magazine published by the Institute for Research on Public Policy. Roger Gibbins is President and CEO, Jacques Marcil is Senior Economist and Robert Roach is Director of Research at the Canada West Foundation in Calgary.
To read the longer version of this commentary, click
here.
