Alberta has taken strides to both diversify its economy and pivot its traditional fossil fuel-based energy sector
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May 11, 2022 • 6 hours ago • 5 minute read • 6 Comments
The Rocky Mountains behind the skyline in Calgary, Alta. Photo by Lyle Aspinall/Postmedia Network files By David Rosenberg, Julia Wendling and Alena Neiland
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Alberta’s economy is poised for a secular economic growth phase, and it’s not just the outlook for energy but also the tremendous strides made toward industry diversification that are responsible.
What used to be a largely energy-growth-dependent economy prior to the double oil-price shocks following the Global Financial Crisis and the 2014 oil crash is now more diversified, with further advances in technology expected to boost this trend over the coming years.
Indeed, Alberta’s most recent budget confirmed investment in the oil-and-gas sector peaked in 2014 and the province’s COVID-19 recovery plan indicated further expanded support for technology, renewable energy and petrochemical manufacturing sectors as diversification becomes a central objective of government policy.
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And, with the recent pick-up in oil prices boosting the province’s revenues, funding for these new initiatives has strong support. That bodes well for the province’s growth potential in a future that is becoming less carbon-friendly over time.
While Alberta’s economy has largely been hitched to notoriously volatile energy prices since the discovery of vast oil and gas reserves in the early 1900s, the back-to-back oil price shocks — and, more recently, the COVID-19 pandemic — conspired to incentivize the province to switch gears towards a more diverse economic strategy.
Indeed, the data bears out the fact that Alberta’s dependence on the oil and gas sector is in a downtrend. In 2005, the energy sector in Alberta accounted for a record 32.6 per cent of GDP, only to be knocked back to 22.1 per cent by 2009 as oil prices fell from over US$130 per barrel to below the US$40 mark.
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And while the resources sector proceeded to stage a partial recovery, achieving a share of 27.1 per cent by 2014, the oil price crash that followed the surprising growth of U.S. shale oil and OPEC’s decision to support global oil supply at a time of weakened demand for fossil fuels sent Alberta’s economy tumbling once again.
An oilfield worker walks past the Statoil oil sands facility near Conklin, Alta. Photo by REUTERS/Todd Korol files As a result, the Government of Alberta acknowledged that there has been an “over-reliance” on energy and started the groundwork for an innovation pick-up in the province, with an aim to be proactive rather than reactive to future economic risks.
Since then, Alberta has certainly evolved in areas beyond the energy sector, particularly on the services side: the finance, real estate, healthcare and information and communication technology sectors have shown gains in contributions to GDP, as the energy sector remained below its 2014 peak.
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Perhaps most importantly, Alberta’s efforts are attracting the attention of global firms looking to set up shop in Canada. Aided by highly attractive commercial and residential real estate prices relative to other parts of the country (notably in Ontario and B.C.), in recent years, firms have started to flock to Calgary: in November 2021, Amazon Web Services announced Calgary as its location for a new cloud-computing hub — a venture that is expected to add almost 1,000 new full-time jobs with an estimated increase of $4.9 billion to Canada’s GDP.
Investment has also flowed in from across the pond, where companies are angling to set up headquarters in Alberta: for example, a U.K. global software company has recently selected Calgary for its North American headquarters. And while this overall shift toward the technology service sector is still in its early stages, employment is starting to reflect the move — a trend we expect will translate into more stable and sustainable economic growth down the line.
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Meanwhile, the energy sector is taking on a new approach to stage its comeback — clean-energy innovation. The most recent budget revealed that oil-and-gas investment will remain below the 2014 peak and announced plans of $1.192 billion of spending in the technology innovation and emissions-reduction sectors.
The growing labour force in Alberta is also expected to further bolster economic activity, as relatively attractive residential real estate prices and its status as a tax haven in Canada draw young. Indeed, Alberta currently has the lowest home price-to-income ratio of any province in Canada — at 83.5 versus the national average of 95.9. So, it comes as no surprise that, in recent years, Alberta has experienced among the highest population growth in the 15-24-year-old age group across Canada (1.2 per cent YoY in March), and the working age population (aged 15-64) has been picking up at an increasing pace relative to the national average since 2017.
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More On This Topic Rosenberg: Resources have overtaken financials on the TSX and their run may not be over yet David Rosenberg: The Fed is tightening and that usually means recession, no matter what they say David Rosenberg: Declining equity risk premium turning TINA argument around This population growth has added to an increasingly strong labour force: in April, employment in Alberta jumped 0.7 per cent, setting the year-on-year labour force expansion to 2.0 per cent, and the jobless rate dove below six per cent for the first time in seven years.
Ultimately, relative housing affordability along with the rise in job opportunities should begin to slow interprovincial outmigration and we expect it to shift to inflows before long, further driving up activity in the service sector, in particular.
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Article content Following several crippling blows to the economy stemming from heavy reliance on the energy sector over the last decade, Alberta has taken strides to both diversify its economy and pivot its traditional fossil fuel-based energy sector towards renewables and emissions reduction schemes.
Fiscal plans set since the 2014 oil crash have provided the groundwork for an innovation boom, which captured interest from international technology firms and laid the groundwork for Calgary becoming Canada’s newest tech hub and a leader in the clean energy space. As a result, we expect further gains in the technology and renewables sectors, providing a much-needed boost to the province’s economic growth over the next years.
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Article content For investors, this translates into a bullish outlook on Alberta’s commercial real estate sector as the province continues to attract a diverse array of international players. In addition, the surprising pivot the Alberta government has taken to prop up the renewable energy space should provide a nice tailwind to domestic companies operating with best-in-class fundamentals in the ESG (Environmental, Social, and Governance) space.
David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. Julia Wendling and Alena Neiland are economists there. You can sign up for a free, one-month trial on Rosenberg’s website.
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