Alberta: Gearing down, fast

“It’s going to be a difficult year,” says Todd Hirsch, economist with Edmonton-based Crown corporation Alberta Treasury Branches (a.k.a. ATB Financial). “We’ve seen layoffs already announced [at oil and gas firms], and I think we can brace ourselves for quite a bit more in the next three or four months.”

With the price of oil languishing, Hirsch now is predicting an estimated rise in real gross domestic product (GDP) for the province of just 1.5% in 2015, well below Alberta’s estimated 3.8% real GDP growth rate last year and a sharp halt to the province’s impressive five-year run of strong growth. In mid-January, the benchmark West Texas intermediate price for a barrel of oil fell below US$47, representing a steep drop from the relatively recent high of more than US$110 a barrel in mid-June of 2014.

Although the province has struggled at times with labour shortages in recent years, this year, unemployment is expected to spike to 6%-6.5%, Hirsch suggests. Firms such as Suncor Energy Inc. and Shell Canada Ltd., both based in Calgary, have announced job cuts, with other firms signalling they may follow suit. Future projects or expansions of firms in the energy sector are expected to be scaled back, postponed or cancelled outright.

Despite this, the broader picture on jobs remains relatively healthy compared with other provinces, says Hirsch: “[A 6.5% rate would] still [be] below the national average, and not far off from what I would call a ‘balanced job market,’ which is 5%.”

Vexing problem

The price of oil could remain low through at least the first half of the year, then start to trend higher later in 2015. “We do expect oil prices to grind higher,” says Jonathan Bendiner, regional economist with Toronto-Dominion Bank in Toronto.

On Jan. 16, the France-based International Energy Agency (IEA) released a report suggesting, in part, that decreasing oil supply, as a result of slowing production, will lead to an uptick in oil prices from current lows. “A price recovery – barring any major disruption – may not be imminent, but signs are mounting that the tide will turn,” the IEA report says.

In the meantime, the effects of low oil prices will reverberate throughout Alberta’s economy.

The manufacturing sector, for example, is likely to see little growth in 2015. A lower Canadian dollar (C$) and U.S. economic demand will buoy the sector, to be sure, but, Bendiner says, “the drop in oil prices is expected to weigh on energy-related industries, [such as] petroleum and coal product manufacturing.”

The commercial real estate sector is expected to struggle, as new office towers under construction will only serve to flood the market. The residential sector also may experience some softening, but not the hard drop the sector went through during the 2008-09 economic downturn.

“There hasn’t been a lot of overbuilding,” Hirsch says.

Consumer spending is likely to level off.

“If you get laid off, or you’re afraid of getting laid off, you might not go buy that new car right away,” Hirsch says.

The lower price of oil does present a vexing problem for the Alberta government, which typically receives 25%-30% of its total revenue from royalties from the oil and gas sector.

Recently, Alberta Premier Jim Prentice forecast a provincial deficit of $500 million for the 2014-15 fiscal year, and somewhere between $6 billion and $7 billion for 2015-16.

“The fact that Alberta is so reliant on royalty revenues has just put a huge fiscal hole in the province’s economic plan,” Bendiner says.

Cutting spending

Tax increases – including the introduction of a provincial sales tax – remains a largely unpopular option among Albertans, as does the notion of the province carrying debt.

The provincial government is looking at how it can cut spending and also may decide to tap into the $5-billion contingency fund to help cover the shortfall, but neither option is a viable long-term fix should oil prices remain low for an extended period of time.

“[The province] still has to come up with a structural solution,” Hirsch says.

Not all sectors in Alberta will suffer in the low oil price environment, however. The forestry, agriculture and tourism sectors will benefit from lower transportation costs and a lower C$ vs its U.S. counterpart, Hirsch suggests. The forestry sector, in particular, may benefit from the decreased competition from the oil and gas sectors for labour.

“I think all three [sectors] will see near-record years of profitability,” Hirsch says.

Silver lining

The lower C$ also will serve as a silver lining to the oil and gas sector, mitigating some of the pain from the lower price of oil.

“[Oil producers] sell oil in American dollars and convert back to Canadian,” Bendiner says. “That does provide a bit of a cushion.”

Hirsch suggests that while the province certainly will take an economic hit in 2015, ordinary Albertans are likely to take a longer-term view regarding the drop in oil prices, based on their previous experiences with the province’s sometimes volatile economy.

“It’s lousy, but we’ve been through this so many times as a province,” Hirsch says. “In 2009, the price of oil dropped from US$147 a barrel to US$33. Compared with that, the current price plunge just looks like a garden-variety downturn.”

Alberta

Population: 4,121,692

GDP, 2013 ($bil.): 338.2

GDP % change: +7.1

2014-15 deficit ($mil.): 500

Estimated net Assets ($bil.): 24 per capita wage growth, % change 2013-14: +3.6

Household disposable income, per capita: $40,486

Figures from latest available reports/estimates

Sources: Conference board of Canada; Province IE chart

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