Energy no longer Alberta’s engine, says economist

Alberta’s oil sector is trying to recover and “make $50 oil work” but analyst Todd Hirsch says the slow growth may allow agriculture to expand with less competition for labourers.  |  Getty photo

Southern Alberta’s focus on agriculture has cushioned it against the recession that devastated parts of the province where the energy sector was the economic engine.

Todd Hirsch, chief economist with ATB Financial, told those at the Alberta Irrigation Projects Association water conference Nov. 21 that agriculture has created a more consistent economic base in the south because of the sector’s ability to control costs and improve efficiency.

Though by some measures the recession is over in Alberta, Hirsch didn’t support that supposition in his keynote address.

Hirsch said oil prices now hover near $50 per barrel, generally considered the break-even point for much of the oil industry. That’s better than the prices seen in 2015-16 but not everyone can function at break-even levels.

At the recession’s deepest point, Alberta’s unemployment rate reached eight percent and Calgary’s rate reached 10 percent.

“In the last 12 months, we have started to see some jobs coming back to Alberta and many of them in the energy sector, which is a bit ironic, since it was the energy sector in ‘15 and ‘16 that shed a lot of workers,” said Hirsch.

“Now this year they’ve been quietly hiring some back.”

However, those jobs are generally at a lower rate of pay.

“What this tells me is that Alberta’s energy sector is finding a way to get their costs down and to make $50 oil work once again.”

Hirsch provided some historical perspective to oil prices. In May 2004, they reached an all-time high. The price was $42.05 per barrel for West Texas Intermediate.

“It was raining money in downtown Calgary. Champagne corks were being popped. The province was in surplus. It was good times. Record high oil prices … today $42 oil is a disaster.”

Today, costs are coming down, largely through lower labour costs, said Hirsch. Though bad for workers, it does mean the industry is positioning itself to be competitive with oil at $50 per barrel.

Hirsch said he now views Alberta’s energy sector as the province’s backbone, not its engine.

“We can no longer rely on it … to be super fueling all kinds of activity around the province.”

In the Alberta retail sector, a key economic measure, sales hit an all-time high in the middle of 2014, just after oil prices started to collapse. By July 2016, they had reached the low point after fire drastically affected the Fort McMurray region and oil prices remained moribund.

In June 2017, however, retail sales surpassed the previous high.

Until the oil price crash, retail sales were on a steady climb and would likely have continued on that trajectory. Hirsch calculated that retail suffered some $39 billion in foregone sales in the last three years.

As for housing starts, another economic marker, there were 32,000 in the March to July period this year. Before the recession, 42,000 homes were being built in that same period and during the recession that number dropped to 18,000.

Hirsch said he thinks housing starts will shrink once again, to 26,000 to 28,000 as interest rates start to climb.

Economic recovery means a return to the previous level, he noted, and by most measures the province hasn’t reached those levels yet.

Evolution rather than recovery is a more accurate term for recent trends, he said.

“I might really wish that the economy is recovering … but just because we wish doesn’t mean that it is true.”

Alberta’s economy is about the size that it was in 2012, said Hirsch.

“It’s still feeling sluggish.”

However, slower growth in the energy sector may allow other sectors the chance to expand without having to compete with the high wages once offered by the energy sector.

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