Mom-onomics: Explaining Alberta’s Economy to Mom

My Mom was reading Grandinite the other day and she had a thought: “why don’t you (me) try to explain the economic turmoil to regular Albertans such as herself?” This brings me to today’s post, which discusses how you would explain the economy to your Mom, your Auntie or even your Gramma.

In short, the world is becoming more scary, but Alberta’s ok. In my opinion, it’s the least-worst place to be right now amidst a planet in turmoil. But even though our underlying fundamentals are sound, how might the global chaos affect us?

My Mom wants to know how the financial mess in the United States will affect Alberta, and in turn, her state of well-being within the big picture. I think many Albertans do as well.

Here’s how I would explain the economy to my Mom:

1. Ask how attractive Alberta’s oil is relative to other people’s oil.

When the price of oil drops, we could see more war in the Middle East. This makes the price go back up. War in Iran is good for Alberta. That’s a sad thought, but the reality is that it’s a good spot to be in. Getting at oil in Iraq, Iran or any of the countries that end with ’stan’ is a risky proposition. You have to drill adjacent to a war zone, and risk having a war blowing up your pipeline. It might be easier and cheaper to get at oil in the Middle East, but getting it to market can be tough. War in Iran makes Alberta’s oil more attractive because 1) we’re close to the US and 2) we’re their single largest trading partner when it comes to oil. We’re well-positioned in this respect. Peace in the Middle East would be nice, but I don’t see it happening for some time.

2. The Price of Oil.

Alberta’s fortunes are tied to the price of oil, like it or not. If it drops below $70 per barrel, that’s not a bad thing. Smart oil producers will forge ahead and use the lower energy costs to their advantage. It’s smart to build when everything’s cheaper. In Alberta, conventional oil (pumpjacks and pipelines) is giving way to unconventional oil (oil sands). If it drops to $50 per barrel, then we might see the conventional oil slow down. This would affect smaller towns throughout the province whose economies rely on oil and gas drilling. But I think the oil sands operators take a longer-term view and they’ll try to get through. So, if oil ever reaches $50 per barrel, and if we see peace in the Middle East, we’ll see planned projects slow down, but ones in construction will continue. People will still have jobs.

3. Population Growth & Housing.

People move to where the jobs are. This creates demand for housing, but they can only afford the housing their income will support. Right now in Calgary, income levels are higher, which support higher house prices. However, in Edmonton, people’s incomes are growing faster, which means their houses are appreciating faster. So, houses in Calgary might hold value, whereas Edmonton’s house prices are still growing strong.

There are three components of population growth here in Alberta. First, there’s the natural birth rate, which is high. The good times give people a sense of optimism, and they have babies. Alberta leads the country when it comes to breeding. We’ll have pressure on maternity wards, and kindergartens will follow. It’s a good time to own a daycare. Second, there’s international immigration, which is strong in this province. Immigrants to Alberta typically come here in search of work. Immigrants to Montreal and Toronto also go there in search of work, but a larger portion of them are also there to avoid persecution back home. Immigrants to Alberta get preference if they bring a skill or money. Sad but true. Finally, there’s net inter-provincial migration. That’s the number of people who move out of the province versus the number who move here from other provinces. Right now, this net balance is near-zero, which means immigration and births are driving population growth. It’s my impression that many older Albertans are moving to B.C., while younger people move into the province in search of jobs. Alberta’s population growth is strong, which will support housing. Any declines in house prices are good, because it’s likely the speculators who are getting hammered for their greed. Property price declines aren’t good for homeowners and homebuilders, but they’re great for home buyers, especially first-timer young families. We want housing to become more affordable for people who move here, but this comes at the expense of people who already own homes. This affects homowner’s ability to take out home equity loans by making it more difficult. I don’t think it’s generally a good idea to borrow against your home equity right now anyways.

4. Construction.

The construction sector is a diverse sector. It’s true that homebuilding has slowed, but construction for institutions, industrial plants and commercial buildings remains strong. This makes Edmonton the place to be if you’re in construction. Have a look at Edmonton’s building permit data for July to see what I mean. People in Edmonton are doing ok. It’s the Calgary executives who might feel a small pinch, because their incomes are tied to stock prices.

5. Short Memories.

Not too many Albertans like to remember the 80’s or even the early 90’s, before Nova reignited the megaproject boom in Alberta. Many of us would prefer to forget the past economic woes. It’s important not to forget, though. In 2006, Alberta’s economic growth rate approached 7% or more, which is a breakneck speed. Right now, we’re doing ok. It’s like slowing down from 120km/hr on the QE2 to 80 km/hr when you get closer to town. Not as fast, but still a decent pace. Our short memories make us forget what it was like before 2006, when we were happy to be travelling 60 km/hr. This is called “returning to trend”. In the long-term picture, we’re still ok.

6. Lending.

This one is important. The current crisis in the United States is akin to an engine with an oil leak. The United States has just voted to pour billions into the banking sector to keep the machine in motion. Some people want to let the engine seize, so it can be rebuilt properly. But the status quo wants to pour more oil into the engine to keep it running, because so many people depend on the engine. This is what ‘providing liquidity’ to the market means. If banks stop lending money, people can’t get loans for cars. If they can’t get mortgages, they can’t take advantage of all the deals out there in the housing market, which drops prices even further. It might not be right that the US economy relies so heavily on the ability of people to go into debt, but that’s the world we live in.

The greatest fear is that if the financial engine seizes, there will be no money for oil companies to borrow. They might need to finance a takeover of a smaller company, or they might want to finance an oil sands project. This all depends on how attractive Alberta is on the world stage. If the rest of the world is looking scary, then Alberta might be seen as a safe haven. Some people say Alberta’s oil is too dirty, and we’re better off buying Middle Eastern crude. I don’t think that will happen. People prefer dirty oil to violent oil.

It’s quite difficult to say for certain how a lending crisis will affect Alberta, but I think this region of the planet is a pretty attractive place. If the world indeed becomes more turbulent, Alberta might be seen as a shining star. That’s my hope.