Peeling back the onion of Alberta’s economy

Alberta and Manitoba share little in common. Sure, they share a love of hockey, golf and swatting mosquitoes but they differ when it comes to their economies.

CALGARY — Alberta and Manitoba share little in common. Sure, they share a love of hockey, golf and swatting mosquitoes but they differ when it comes to their economies.

That’s because Manitoba has what Alberta doesn’t: a diverse economy.

In Alberta, the oil and gas industry has been its lifeblood for decades, with other industries often struggling to compete in its shadow. Albertans tend to ramp up their collective anxiety when energy prices tank and they find their economy plunging into recession (most recently in 2009).

But rather than just asking: Are we diversified enough? the questions Albertans should also be asking are: Why does it matter? and Is there anything we can do about it anyway?

The first question — Are we diversified enough? — is a bit slippery. Depending on what specific answer you want, the data can suggest any number of conclusions. On paper, Alberta is nicely diversified, with companies engaged in manufacturing, services, professional activities and other industries not directly involved in drilling hydrocarbons.

But peeling back one layer of the economic onion reveals an economy that can bring tears to some eyes. Certainly there is a flourishing manufacturing sector, but the vast majority of it feeds indirectly into the energy sector — refining, steel drilling pipe, specialized equipment for the oil sands, etc. And many of the professional services sectors (e.g. banking, finance, legal, advertising, etc.) depend to a frightening degree on energy company clients.

However, there is a silver lining.

Alberta’s economy may not be diverse in a practical sense, but there is much more diversity within the energy sector than ever before. In the 1970s, conventional crude was the only show in town. Today, the province adds to that natural gas, tight oil, renewable energy and, of course, the oilsands. It’s all ‘energy’ — but it’s all driven by different price and cost functions. Alberta doesn’t need all of them to be firing on all cylinders at all times to be doing well. (Witness the low prices for natural gas in 2011 when the provincial economy still grew at 5.2 per cent.)

The second question — Why does it matter? — is even more complex.

There are two good answers to that question. The first is diversity would mitigate the wild boom-and-bust that Alberta is known for; the second is that more legs on its economic stool will prepare it for the day when the world loses its thirst for our hydrocarbons. The latter is a much more serious problem.

Booms-and busts are often unpleasant, but consider Manitoba, the Canadian province with the most nicely diversified economy. It does not suffer the wild swings that Alberta does and it was the only province in 2009 to avoid a recession. That said, I don’t hear anyone in Alberta suggesting that we’d all be better off if its economy looked more like Manitoba’s.

Rather, preparing Alberta for the time when oil is not priced at $80, $100 or $150 a barrel is a more pressing matter. It’s not doom and gloom to suggest that at some point the world will be less dependent on hydrocarbons — it’s reality. It may be in 10 years or 100 years, but it will come. And then where will Alberta’s economy be? It’s a question that deserves serious thought.

Finally, the third question — Is there anything we can do to diversify the economy? It’s been the Holy Grail for policy makers in this province for decades — they try and try and try, but a nicely diversified private sector always seems to lie just outside their reach. Government programs at both the federal and provincial levels have been underwhelming in their effectiveness. It’s sort of like asking the government to stop plate tectonics: the challenge isn’t to prevent earthquakes, but rather to minimize the damage when they happen. That takes planning, preparing and good building design.

Diversifying Alberta’s economy is similar.

Maybe the best it can do is plan and prepare for the day when it really will need non-energy-dependent industries to thrive. Is the private sector doing all it can to explore renewable energy resources and the know-how behind them? Is it targeting its value-added industries at the highest level possible, which may not be in secondary manufacturing but in the design, technology and engineering industries?

If it doesn’t take collective action now, Alberta may find Manitoba gets the last laugh.

Troy Media columnist Todd Hirsch is senior economist with ATB Financial. He can be reached at todd.hirsch@troymedia.com.

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