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Andrew Leach is an energy and environmental economist and associate professor at the University of Alberta’s Alberta School of Business.

Alberta is on a bit of a roll. Last week’s fiscal update from the provincial government projected a $12.4-billion deficit reduction for the year, and a further $13.4-billion reduction in the combined deficits over the next two fiscal years. Risks remain, but there is no denying that the fiscal picture in the province is much brighter than we’ve seen in years.

This isn’t a big win for the fiscal hawks. Spending is up nearly $2-billion over the budget forecast for this year, mostly because of COVID-19 measures.

But revenue is also up – way up. Almost $28-billion more is forecast to flow into Alberta’s coffers by March, 2024, compared with what was forecast in February’s budget.

What’s driving this change? A few factors are at play, but none more important than royalties from oil sands bitumen. Alberta’s bitumen bounty is now expected to increase by $13-billion over the next three years.

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Oil prices are the most significant factor, with the fall run-up in global energy prices finding its way to the bottom lines of Alberta’s energy producers.

Additionally, some oil sands projects are reaching payout, a measure of overall profitability that triggers higher royalty payments. So long as prices stay high, more projects will move to these higher rates, leading to higher royalty payments for every barrel produced in years to come.

But with the oil companies and the government suddenly flush with cash, why does it not feel like a boom? To some, of course, it does. But that is certainly not the case for everyone. And the reasons become clear when we look at economic activity and investment levels over the long term.

According to this week’s update, Alberta’s real GDP will grow by an average annual rate of just 1.12 per cent between 2019 and 2024. If we look back to 2014, Alberta is on track to average only 1.15-per-cent growth over the decade. During the previous decade – from 2004 to 2014 – inflation-adjusted GDP growth averaged more than 3.5 per cent a year.

We’re still recovering from the COVID-19 recession, and Alberta will continue to lag Canadian average GDP growth for the foreseeable future. The Royal Bank of Canada’s latest forecast, released this week, predicts the Canadian economy will have grown by an average of 1.5 per cent a year through 2023, while the Alberta economy will have averaged a slightly lower 1.4-per-cent growth rate.

The fiscal update shows an increase in oil and gas investment relative to what was previously forecast, but what really matters to the economy is the level of investment.

Oil and gas investment is forecast to remain markedly below previous highs, with 2023-24 investment about the same in nominal terms (not adjusted for inflation) as in the depths of the recession in 2016-17. If the forecast bears out, levels will be at about half of what we saw in 2014. On an inflation-adjusted basis, the picture gets even worse.

You can see echoes of this in other data, too. We’re still well below historic levels in labour compensation, a reflection of a weaker overall economy and job market. The University of Calgary’s Trevor Tombe has estimated that we remain almost $1-billion a month below 2014-15 levels, before adjusting for inflation.

Why are these levels still so low? The previous boom was, for all intents and purposes, an oil sands project construction boom. And there are three key factors preventing a return to those days.

First, there remains substantial uncertainty about long-term oil prices. We learned (painfully) after 2015 that there was a lot of cheap oil in the world. We’re in the midst of a period of relatively high prices, but that’s unlikely to last. A lot of that cheap oil is still out there, and most forecasts of long-term demand are dropping fast.

Second, oil sands projects require long-term bets. Unlike some oil resources, an oil sands project involves a large, upfront investment and a long wait for returns. Evidence from around the world shows oil companies have been shying away from long-cycle investments for years.

And, finally, there is climate change risk. As the world acts on climate change, oil sands projects have already found themselves vilified, and that’s only going to get worse. If companies aren’t jumping at the chance to make long-term investments in oil in general, they are going to be even less excited to make long-term investments in emissions-intensive oil.

So, while higher oil prices and the royalty boom they bring may help Alberta’s government balance its budget, it’s going to take a lot more than that to make it feel like a boom again for the people of Alberta.

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