Glen Hodgson is a senior fellow at the C.D. Howe Institute. Charles St-Arnaud is chief economist at Alberta Central.
Alberta has earned a reputation over many decades for being a boom-bust economy. Strong oil demand and high prices have created boom times for jobs, incomes, investment and government revenues, while weak demand and falling prices have meant a slowdown or even recession on occasion.
But now, global demand for oil is again rising and prices are high, yet more oil-production revenue is not translating into a sustained economic boom for Alberta.
The province’s economy grew by 4.8 per cent in real terms (with inflation removed) in 2021. A budget surplus has financed or paid for Premier Danielle Smith’s latest inflation-relief handouts. While that sounds good, there was no oil boom; this growth is simply part of a pan-Canadian recovery from the pandemic shutdown in early 2020.
Despite high oil revenues, Alberta’s 2021 growth performance trailed that of most other provinces and territories, ahead of only Manitoba, Newfoundland and Labrador and Saskatchewan. Growth has since slowed with a weak outlook and possible recession projected into 2023.
The reason for this is that oil producers may be reaching a pivotal point, eschewing expansion and even seeking to reinvent their business model amid a global push for structural change toward energy with much lower greenhouse gas emissions.
A significant shift appears to be taking place in how the province’s oil producers are allocating their revenues away from investment and toward payments to investors. Although oil revenues have soared to more than $12-billion a month in 2022 thanks to high prices and record-high provincial oil production, this revenue gusher is not translating into strong investment.
Alberta Central, which serves the province’s credit unions, has analyzed the financial statements of major oil producers. It estimates the share of oil producer revenues being used for dividends and share buybacks has nearly tripled to 11 per cent today, compared with about 4 per cent in 2014. Most shareholders receiving the boost to income and asset values are not Albertan or Canadian, so there is financial leakage that is limiting overall provincial growth.
Moreover, Alberta-based oil producers are reinvesting much less into their operations than before – $15-billion or 7 per cent of producer revenues today, versus $25-billion or 25 per cent of revenues at the peak in 2014. Current investment is largely focused on capital expenditures that improve operating efficiency, not on expanding longer-term oil production capacity.
A few interpretations are possible. The numbers could reflect a temporary adjustment due to the exceptional sudden windfall in oil revenues. This interpretation might explain the exceptional dividends and buybacks, but not the sharp drop in oil revenues being allocated to investment, or the shift from capacity building to investing for efficiency.
A second interpretation would focus on specific bottlenecks. Insufficient pipeline capacity for Alberta’s oil can discourage investment in new oil production. Regulatory delays can impair investment appetite. A proposed cap on oil and gas sector emissions would add another layer of uncertainty. These interpretations are reasonable, but do not address the full context.
A more holistic interpretation is that many Canadian oil producers have begun a structural repositioning of their business model, reflecting a global shift toward energy production and use with much lower GHG emissions. By extracting maximum shareholder value from existing assets and limiting investing in significant new productive capacity, oil-producing firms would be acting like a rational business in a mature industry facing an eventual decline in demand. When demand might soon plateau, value for shareholders and business repositioning become higher priorities than investing in production.
We will only truly know after the fact whether this is the beginning of a pivotal point for Alberta’s oil producers. But if this interpretation is correct, there will be many consequences for the provincial economy. The oil-driven boom-bust cycle may end, and patterns of investment, employment and migration, income and growth will all be affected. There will also be national implications – for international trade, investment and capital flows, the value of the loonie and, ultimately, the Canadian economy’s competitiveness and growth potential.