Alberta to Lead the Rest of Canada in Economic Performance for the Next Decade - BMO Economics
High energy prices, together with increased production and investment in oil sands projects, mean Alberta should continue to lead the rest of Canada in economic performance over the next decade, according to a new paper from the BMO Financial Group Economics Department. The paper, entitled “Alberta's Long-Range Outlook: ‘Oil's Well'”, assesses Alberta's economic outlook compared with the rest of the nation over the next decade.
“Alberta's stellar economic and fiscal fundamentals provide a solid base for future growth,” according to Rick Egelton, Senior Vice-President and Chief Economist, BMO Financial Group. “Barring a collapse of energy prices, the province is poised to widen its economic and competitive lead against the rest of the nation.”
The paper states that Alberta's economy, measured in constant dollars, will grow 0.9 percentage points faster than Canada's economy, on average, between 2005 and 2015. “Living standards, already the highest in the nation, will increase dramatically,” stated Mr. Egelton. “Alberta's nominal GDP per capita will increase from the current 45 per cent above the national level to 55 per cent by 2015.”
Alberta's industries will almost all share in the province's prosperity. “Several industries, including oil & gas extraction, business services, retail trade, construction, accommodations and food services, will outperform their national counterparts,” noted Mr. Egelton.
This economic strength will result from the net impact of five major forces:
Relatively high energy prices: Historically, and not surprisingly, Alberta's economy tends to outperform the national economy when energy prices are on the rise. “The expected high level of energy prices over the next decade will indirectly support the level of economic activity in Alberta relative to the nation by enhancing corporate profitability, personal income and tax revenue, as well as by fueling higher demand for energy services and drilling activity,” said Mr. Egelton.
Energy Prices
Increased output from the oil sands: Production from the oil sands is expected to increase 170 per cent from about 1 million barrels per day in 2004 to 2.7 million barrels in 2015.
Decreased Conventional Energy Production: Output of conventional crude in Alberta has been in secular decline since the mid-1970s, while production of natural gas peaked in the early 2000s. “We expect output of conventional oil to decline by one-third between 2004 and 2015,” stated Mr. Egelton. “In contrast, natural gas production will likely be flat, with declines in conventional output offset by rising output of coal bed methane.”
Heavy Capital Expenditure in the Oil Sands: Alberta Economic Development currently reports $70 billion worth of oil sands projects at various stages of development in the years ahead, with the bulk of the projects scheduled for completion by 2009. “Since a number of new, yet-to-be-announced mega projects are likely to come on stream, we believe spending has scope to ramp up considerably over the next several years to about $10 billion annually by the end of this decade, before rising modestly further by 2015,” noted Mr. Egelton.
High Population Growth: The province's labour market is expected to remain very tight through the forecast horizon, which means that Alberta will need to attract a significant number of workers from other provinces and countries to satisfy production requirements. “We estimate that in-migration will add an average 29,000 people per annum to Alberta's population in the decade ahead, comparable to the trend of the past decade,” said Mr. Egelton. “This means Alberta's population will likely grow 1.2 per cent per annum, on average, in the decade ahead, or 0.5 percentage points faster than the projected national rate of 0.7 per cent.”
As a result of the energy windfall, the Alberta government is in the enviable position of running large surpluses in the next several years. Options for allocating this windfall include saving (i.e. accumulating assets), reducing taxes, and increasing spending (particularly capital spending). Undoubtedly, some combination of these options will be chosen.
The full report is available at www.bmo.com/economic.
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