Just don't call it a boom: Alberta poised for growth supercycle

By Gary Lamphier, Postmedia News -  June 17, 2011


Two years after the Great Recession ended, Alberta's energy-fuelled economy is again flexing its muscles. With oil prices tripling from their 2009 lows, drilling activity on the upswing, unemployment falling and oilsands investment surging, Alberta looks poised for a new growth supercycle.
Photograph by: Bruce Edwards, file, edmontonjournal.com

EDMONTON — Two years after the Great Recession ended, Alberta's energy-fuelled economy is again flexing its muscles.

With oil prices tripling from their 2009 lows, drilling activity on the upswing, unemployment falling and oilsands investment surging, Alberta looks poised for a new growth supercycle.

In fact, compared with the beleaguered U.S., the debt-ridden economies of Europe or the sluggish growth in Ontario and Quebec, Canada's energy superpower looks like a rising star once again.

Just don't call this new growth cycle a boom, at least not yet. There are still nagging patches of weakness and some serious challenges ahead, both from within and beyond Alberta's borders. To wit: The U.S. recovery remains fragile, China's supercharged economy is slowing, and the 27-month-old bull market in equities looks as if it may be running out of gas.

Moreover, the province continues to run large budget deficits; natural gas prices remain abysmally low; lumber prices are in the ditch; housing starts and house prices are flat; and interprovincial migration, which peaked in 2006, is just starting to rebound.

"Boom would probably be an appropriate term if there weren't all these clouds on the economic horizon," says Craig Wright, chief economist at RBC Capital Markets

"Last year the story was continued upward revisions to global growth. Now that story has run its course, and we're starting to see many central banks in emerging economies putting the brakes on," says Wright, who expects Alberta to lead the country in growth in 2011.

"There is a risk they'll go too far and we'll see a sharper slowdown than we're expecting, so global growth could come down and then you'd see some fallout in commodity markets, which would take some of the boom out of the boom."

Those aren't the only worries. The oilsands also face stiff opposition from the green lobby and some members of Congress, who hope to slow further mine expansion and derail plans for pipelines that would carry bitumen to the Gulf Coast and Canada's West Coast.

Without this new capacity, billions of dollars of future investment, tax and royalty revenues could be at risk, and Alberta's oil riches might never reach China or other fast-growing Asian markets. Economic threats aside, the B-word has also become something of a toxic term for many Albertans.

With memories of the savage 2008-2009 downturn still fresh, and dreams of a burgeoning Upgrader Alley east of Edmonton sharply scaled back, the current mood is less ebullient and more realistic than it was in 2007.

Besides, few want to see a repeat of the chronic labour and material shortages, huge cost overruns and frenzied speculation that accompanied the last peak.

"It's a quiet boom, not a sonic boom. People are scared to call it a boom because of what happened in 2007, with the way it almost imploded on itself," says Neil Shelly, executive director of Alberta's Industrial Heartland Association.

"But upstream in Fort McMurray, if it is not a boom there I don't know what you would call it. They have a lot of projects in the pipeline that are already approved."

A staggering $180 billion will be spent on new oilsands projects over the next decade, according to a recent forecast by Peters & Co., with annual spending expected to peak at $22 billion by 2014.

Even those lofty figures fail to reflect the whole story. Annual spending on oilsands operations and maintenance now exceeds new capital investment, pushing the total current outlay to more than $30 billion a year.

That will only grow in the years ahead, according to a report by the Canadian Energy Research Institute (CERI). It estimates total oilsands investment at nearly $2.1 trillion over the next 25 years, as global demand for crude ramps up.

Using a "realistic scenario," CERI estimates that oilsands output will reach 2.1 million barrels per day (b/d) by 2015 and 4.8 million b/d by 2030, up from about 1.7 million b/d currently.

Demand for natural gas — used to heat and extract the bitumen — is also expected to soar, along with employment levels and provincial royalties.

The number of direct and indirect oilsands jobs will top 900,000 by 2035, CERI estimates, up from just 75,000 in 2010, and oilsands royalties alone are expected to reach $15.5 billion by 2019. That would top the record $14.3 billion in total resource revenues Alberta generated in 2006-07.

Still, most Alberta business executives, economists and policy-makers hope the next decade brings a prolonged period of more modest but sustainable growth, where the excesses of the past are kept in check.

Think of it as the Great Expansion, if you will. That may not sound as sexy as the word boom. But if Alberta's energy giants and the province's political leaders can better manage the stresses that come with growth, the coming decade should bring unprecedented prosperity.

"Alberta's economy is doing quite well, and we're in a very enviable spot if you look at the G8 countries or many regions in the U.S. It's hard to find a place right now that's actually doing better than Alberta or Western Canada in general," says Todd Hirsch, ATB Financial's senior economist.

With economic growth of four per cent in 2010, Alberta led all provinces except Newfoundland, a province whose economy is 90 per cent smaller than Alberta's. Most forecasters expect the uptrend to continue.

"Natural gas prices are still an enormous challenge, but there are a lot of other strong points that compensate for that. Anything to do with oil, whether it's conventional drilling, oilfield services or oilsands, is powering the provincial economy ahead," says Hirsch.

That upbeat view is widely shared by economists at Canada's major banks and the Conference Board of Canada. Most expect Alberta and Saskatchewan to battle for top spot among Canada's provinces in 2011 and 2012, along with Newfoundland.

The Conference Board sees Alberta's GDP (gross domestic product) expanding by 3.1 per cent this year and four per cent in 2012. Only Saskatchewan is expected to post stronger numbers percentage-wise, with growth pegged at 4.2 per cent both years.

RBC Economics and BMO Capital Research see somewhat stronger growth for Alberta this year, at 4.3 per cent and 3.6 per cent, respectively, with growth decelerating a bit in 2012.

BMO expects that Alberta, after trailing Saskatchewan and Newfoundland this year, will lead the provincial rankings in 2012, while RBC ranks the province No. 2, behind Saskatchewan.

Alberta's eastern neighbour, with an economy a quarter that of Wild Rose Country, is riding a boom in potash and other agricultural products as well as oil.

"I try not to get too caught up in pinpointing the growth rate, but I think in general Alberta is going to be near or at the top of the provincial rankings in growth and Western Canada, led by Alberta, will continue to be the epicentre of growth in this country," says Hirsch.

That said, the growth won't be spread evenly. Right now, growth is stronger in the northern and eastern halves of the province, he says, and weaker in the south and in the foothills of the Rockies.

"As you move north, attitudes and economic conditions generally improve. In Lethbridge and Medicine Hat they're good. When you get to Calgary it's better. And in the Red Deer-Nisku-Edmonton corridor, it's better again," says Hirsch.

"By the time you get to Fort McMurray it's ecstatic. Fort McMurray's economy is exactly where it was before the downturn started three years ago. They've fully recovered and they're already facing labour shortages."

The upward momentum is spreading to other sectors too, such as manufacturing. The total value of factory goods shipped in March topped $5.7 billion, up nearly 18 per cent versus a year earlier.

"We've got (order) backlogs in all of our operations now. Rather than spending our time trying to cut costs,we're spending our time trying to find people," says Jim Rakievich, chief executive of McCoy Corp., an Edmonton-based energy equipment manufacturer.

"In Edmonton we're looking for 15 to 20 people right now, both skilled and unskilled, for our manufacturing and general operations, and they're hard to find."

That's a familiar story. Dozens of companies are already feeling the labour pinch. One firm alone —construction giant Ledcor Industries — hopes to hire 9,000 new workers in 2011.

With Alberta's unemployment rate down to 5.4 per cent from a peak of 7.5 per cent in the spring of 2010, the battle for talent is already at a fever pitch.

Retail sales are also up sharply this year, with the March tally of $5.2 billion just below the record high set in June 2008. ATB economist Dan Sumner expects retail sales to hit new highs in the months ahead.

Cattle prices and beef exports are also rebounding sharply, as the province's agricultural sector recovers from the recession.

On the wage front, Alberta continues to lead Canada's provinces by a wide margin. According to the latest data from Statistics Canada, average weekly earnings in Alberta topped $1,037 in March, up 5.8 per cent over the previous 12 months, and more than 18 per cent above the Canadian average of $876.

With average house prices in Alberta essentially flat over the past three years, Calgary and Edmonton now rank among the most affordable major metro markets in Canada, according to a recent survey by RBC Economics.

It costs a staggering 72.1 per cent of total average pre-tax household income to carry a mortgage on a typical detached bungalow in Vancouver, and 47.5 per cent in Toronto, RBC says. In Calgary, the comparable figure is 35.9 per cent; in Edmonton, it's a mere 31.5 per cent.

That's a key reason why economists expect interprovincial migration to rebound sharply. As job growth and wage gains continue to edge up, that will boost new housing demand.

One top Edmonton-based residential developer says his firm expects a 50 per cent jump in annual revenues by 2012. To meet that, the firm aims to increase its staff count by at least a third.

"I see Alberta on the cusp of what I hope doesn't turn out to be another out-of-control boom, like the conditions we saw in 2006 or 2007," says ATB's Hirsch.

"That led to all kinds of imbalances, especially in the labour market and the housing market. So I'm hoping we're not going back there. But I do see momentum in the province picking up gradually through 2011, 2012 and 2013, driven by oil prices and an eventual recovery in natural gas prices."

Instead of the torrid six to seven per cent GDP growth rates the province experienced at the height of the last boom, Hirsch say, he'd rather see "nice, moderate" growth of three to four per cent annually.

"Faster is not always better when it comes to GDP growth. We tend to think it is and we've led people, especially politicians, to think faster is better. But faster is not better," he says.

"Even China and the emerging economies are finding that out. You don't want your economy growing at 10 per cent a year (like China). You need to rein it in, or it's going to end badly."

The same goes for oil prices, he warns. If prices reach $120 U.S. a barrel or more once again, that could derail the global recovery — and with it, hopes for a new era of sustained growth in Alberta.

"When you see oil prices spiking by $2, $3 or $5 a day, that's not a situation Alberta wants to be in because it's not driven by (market) fundamentals, it's being driven by speculators," he says.

"It's like pulling on an elastic band. The harder you pull on that band, when it eventually gives, the reaction is going to be a lot more violent. So that's why I would prefer to see oil prices fluctuate around $80 to $90, not too far away from that fundamental supply-demand price. That's a nice healthy level that would really support Alberta's economy."
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