Diversifying Alberta's economy away from oil won't be easy
Nearly everyone agrees Alberta needs to diversify. The question is: How?
In the fall of 2011, when oil was trading around $100 a barrel and Keystone XL still seemed a no-brainer, the Canada West Foundation brought together 30 economists, academics and business people to talk about diversifying Western Canada’s economy.
The report was called "Who Cares about Baskets, We’ve Got Eggs!" – a clever title that neatly sums up Alberta’s approach to diversification when times are good: Eh, who cares?
The report concluded that diversification was still a relevant objective in Western Canada, but not as important as the pursuit of prosperity more generally.
Translation: Times are so good right now, let’s keep riding the wave.
That kind of thinking has come back to haunt Alberta.
With a projected budget shortfall of more than $6 billion and forecasts of flat, if not negative, economic growth, Alberta is once again talking diversification.
"The only piece of the economy that picks up during these kinds of downturns is conferences on how we can diversify our economy," says Todd Hirsch, chief economist at Alberta Treasury Branch. "We don’t tend to worry about it too much when oil is at $100."
Frittering away wealth
Here’s an example of what Hirsch is talking about. In 2006, riding a wave of resource revenue, Alberta’s government sent a $400 cheque to each Alberta resident not in prison.
It was called the prosperity bonus, or more colloquially "Ralph bucks," after then Premier Ralph Klein. It cost the province $1.4 billion.
"At the same time, the University of Calgary was looking at expanding," says Hirsch. "It had great plans for a downtown campus that was going to cost around $1 billion. I think we missed some great opportunities to invest in our post-secondary education systems; instead, we frittered away our money. People got a couple of dinners and put some gas in their Hummer, and that was about it."
We chase it and chase it and chase it and never really crack the nut.- Todd Hirsch, chief economist, ATB Financial
Hirsch is not being too harsh.
Although some donated to charity or used the money to make ends meet, an unscientific survey of a dozen colleagues here at CBC Calgary shows a lot of frittering took place. Ralph bucks were spent on iPods and beer, ski equipment and one fondue party for 80 people. No Hummers though.
Alberta’s economy is more diversified than it was 30 years ago. In 1985, direct revenues from the energy sector accounted for 36 per cent of the economy. In 2013, that number was 26 per cent.
However, that doesn't account for the indirect effect of the oil industry. For example, construction accounted for 11 per cent of the economy in 2013, but that would include pipeline and oilsands construction. Finance accounted for four per cent, but that would include loans to the energy industry. The actual number is impossible to pin down – but is certainly higher than 26 per cent.
"There’s spinoff after spinoff," says Doug Porter, chief economist at the Bank of Montreal. "When you just look at broad numbers, it understates the dependence of the province on the energy sector."
For many years, the goal of diversification was to have an economy that looked more like Ontario, with no dominant industry. To achieve that, many things were thrown at the wall.
The Lougheed government of the 1970s tried diversification through outright ownership of diversified companies, as an example, buying a stake in Pacific Western Airlines and moving its head office to Calgary.
In the '90s, it was the Alberta Advantage, the idea that low tax rates would encourage businesses to move to the province.
"We chase it and chase it and chase it, and never really crack the nut," says Hirsch.
Scott Jenkins is the president of DIRTT Environmental Solutions, a company that has nothing to do with the energy sector, despite its name.
DIRTT manufactures commercial office interiors using video game technology, and is a success story by any measure. A decade old, it will post more than $100 million in revenue this year and has grown to 850 employees.
"We’re really a tech company that operates in an older industry of construction. Instead of studs and drywall, we use software."
Hiring gets easier
Jenkins says when DIRTT started, it had no trouble raising money in Alberta, but as it has grown, it’s been hard to find skilled staff. The money was there, the people were not.
"You are competing in the good times with the resource industry, which can pay people really well," says Jenkins. "The quality of life is very high and the skill sets – technology and engineers, geologists – are geared specifically to that industry."
DIRTT recently opened an office in Salt Lake City, Utah, because it was easier to find the software programmers it needed.
"It’s not to say we can’t find quality people in Calgary. We can. It’s just a little more difficult," Jenkins said.
Companies like DIRTT will have less trouble attracting staff now, as the labour market in Alberta deteriorates. There's an upside to that, says Hirsch.
"It's now maybe an opportunity for those non-energy industries to gain a foothold. There will be some nice resumés coming though the door."