When Alberta’s economy crashes, you really know it.

There are mass layoffs, foreclosures, bankruptcies, empty office towers, weed-eaten industrial parks, homeowners walking away from mortgages, sports cars and fancy trucks being practically given away in the Bargain Finder, hours of shouting on talk radio and rueful country and western tunes. Yet, little of that is happening right now, even though Alberta is being pummelled by problems that ought to have our cowboy poets penning new laments.

First, there are higher energy royalties coming in 2009. Whatever you think of “Big Oil” and its allegedly limitless ability to make money, Alberta Premier Ed Stelmach has made producing energy a lot more expensive. He has brutally punished successful drilling of higher-rate, productive, deeper oil and natural gas wells. Despite promises of new deep-gas drilling incentives, fear and uncertainty have wiped out the crucial winter drilling season for many companies. As of early January, almost 60% of Alberta’s huge fleet of drilling rigs were idle. This is normally the time of maximum activity. For instance, at this time last year, the rig utilization rate was 90%.

Second, commodity prices remain problematic. Natural gas drives most of Western Canada’s drilling, supporting the hundreds of small exploration and production companies that form a substantial part of Calgary’s business culture. It’s also important to big producers, such as Royal Dutch Shell PLC and Canadian Natural Resources Ltd. With weaker prices and higher royalty rates, many gas prospects now are simply uneconomical.

Oil prices, which recently hit US$100 a barrel, should be compensating, shouldn’t they? But, believe it or not, the intra-Alberta light oil price in late 2007 was virtually unchanged from a year earlier. With oil being benchmarked to the U.S. dollar, the Canadian price falls as our currency rises in value. Put another way, Canadian companies sell oil in U.S. dollars but write financial statements in Canadian dollars. Our dollar’s rise of more than 60% since 2002 has wiped out most of the oil-price gain for Alberta producers.

We’re also one year closer to the death of the income trust. Most Calgary-based energy trusts have not developed a convincing post-2011 business model. It’s anybody’s guess what will happen to their cash flow, production and investor base. Objectively, the energy trusts had a decent year in 2007; 2008 should be similar. Future taxability, however, is just one more bit of uncertainty.

In addition, the credit crunch is reverberating in Alberta. Some junior energy producers had invested in asset-backed commercial paper in order to earn better interest; that money is now frozen. Meanwhile, the overall tightening of credit markets is squeezing capital budgets everywhere, from tiny private companies to top-flight senior producers. I’m told that this past autumn, 11 of 12 pre-construction-phase oilsands companies were refused access to further capital.

Finally, don’t underestimate the cumulative psychological impact. Alberta’s business world is grumpy, pensive and spooked. Fearful of making mistakes, nobody wants to make decisions — unless it’s cancelling stuff. The sunny optimism and boundless confidence that drove our gross domestic product to $242 billion in 2006 from $100 billion in 1998 and added almost one million new Albertans over 15 years has taken a pounding.

And, yet, something singular is going on. This region had been a boom-and-bust economy since the coming of the railway — floating on great external waves in cattle, grain farming, the Great Depression, world wars and, for the past half-century, oil and natural gas. Giddy prosperity and devastation were held apart by the pricing of just one commodity. This time seems quite different. Multiple successive problems haven’t pushed us into a bust. Alberta’s economy seems to have entered uncharted territory. Perhaps it’s growing up; maybe its flowering diversity and swelling internal market have created a new, much more resilient economy, able to absorb a flurry of blows and just carry on. Here’s hoping. IE



More of George Koch’s writing may be found at www.drjandmrk.com.