The way to get a recession in Edmonton

John Rose, Chief Economist at the City of Edmonton, started his presentation at the Edmonton Real Estate Forum earlier this month with a bit of humor. “There are two kinds of forecasts,” he told the packed room. “Lucky and wrong!” He finished it on a much more serious note, saying “the way to get a recession in Edmonton is to have the provincial government make cuts.”

Edmonton Real Estate Forum

The general message from Rose was that because Edmonton’s economy is more diversified than Calgary’s or the rest of Alberta, we have handled the downturn better than those locations. “Lethbridge might be the only other jurisdiction that is less reliant on energy than Edmonton,” he said. But, there are reasons to be less optimistic about future growth.

Our unemployment rate went up during the economic downturn “primarily because our labour force grew faster than we could generate jobs,” Rose said, pointing to the increase in migration from other regions that fared worse. It has since gone down to 6.6% but that’s not necessarily a good thing. “The unemployment rate in Edmonton has been going down for exactly the wrong reason,” Rose said. Over 11,000 people have left the labour force in the last 12 months. “Nearly all the job gains we saw in 2017 have been eliminated in the first quarter” of 2018, Rose said. “Education, manufacturing, health care, and professional services have all gained jobs,” he said, while “trade, retail, public administration, transportation, and warehousing have all lost jobs” in the Edmonton area.

public sector employment

As the above chart shows, Edmonton’s public sector workers, which includes those in government, health, and education, make up about 25% of our workforce. The data hasn’t been updated yet for more recent years, but based on data from the 2016 census as well as the provincial Labour Force Statistics report for April 2018, I believe the trend holds.

You can see that the public sector makes up a larger part of Edmonton’s workforce compared with Calgary or the rest of the province. Which means that cuts to public administration, health care, or education hit Edmonton harder than the rest of the province.

So what’s a likely reason the government would need to make cuts? Though Edmonton may be diversifying away from oil, Alberta as a whole is still dependent.

Rose spoke for a while about the price of oil, and it’s impact on the province. “While we have seen North American and Global oil prices accelerate,” he said, “it is only recently that we have seen any benefit from that in Alberta.” He explained the difference between the Brent (the global benchmark price), WTI (the North American benchmark price), and WCS (the Alberta benchmark price), and noted the price discount we’re experiencing “due to export capacity constraints.”

WTI vs WCS

“We are now producing more oil than we can move due to limited capacity,” he said, “which is why the pipelines are so important.” Rose said he was shocked at the speed with which energy companies began to cut back due to the decline in oil prices a few years ago, in contrast with Ontario where he spent most of his career. There he said the economy is “much more like an ocean liner, it’s slow to turn.”

WTI vs WCS

“Oil production in North America is at record levels,” Rose said, “and given our inability to move product out of Alberta, there’s a real risk of oil prices continuing to decline, which would put the provincial government in an even worse position.” That could force it to look to cut costs, which could have a very negative impact on Edmonton’s economy.

Provided that doesn’t happen, Rose expects Edmonton’s economy to do quite well. He expects the unemployment rate to continue to drift downward over the year. “Population growth will continue but at a slower rate,” he said. Vacancy rates at about 7% have driven rental rates down, and thanks to a potential overbuild of single family homes in 2015, “there might be too much inventory”, helping to keep prices in check. “Low inflation will boost real incomes for Edmonton residents as average weekly wages are rising again,” he said.

Rose forecasts that Edmonton and the region “will grow more rapidly than Alberta and Canada” through 2023. Let’s hope he’s lucky, not wrong.

The two oil-related charts above come from Alberta Energy. Canada is the fourth largest producer and third largest exporter of oil in the world, with the oil sands accounting for 62% of Canada’s oil production, according to Natural Resources Canada. There’s more on Alberta’s energy industry at the National Energy Board.

Recap: Edmonton’s Economic Impact Luncheon 2015

“Never waste a good crisis,” EEDC President & CEO Brad Ferguson told the hundreds of Edmonton business leaders gathered today at the Shaw Conference Centre for EEDC’s annual Impact luncheon. He channeled local business pioneer Frank Spinelli and said “it’s what you do in the good times that determines how well you perform in the bad times.” He argued that Edmonton and EEDC in particular have done a lot of great things over the last two years when times were good and that means the year ahead won’t be as bad as many anticipate.

A short while later, Premier Jim Prentice took to the stage and disagreed. “It is what we are going to do in the bad times that will determine how successful we’re going to be in the good times,” he said. The Premier talked about the need to change both the income and expense side of the equation, and cautioned that all Albertans will have a role to play in making it through a difficult time.

So which is it? Well, it’s probably a little bit of both. The feeling I was left with after today’s luncheon is that Edmonton has been doing the right things and will weather the coming storm better than the province as a whole.

impact 2015

Mayor Don Iveson brought greetings to start the event and offered his two cents on the economic situation, saying “there’s no reason to panic.” He said the Edmonton economy is becoming more resilient as it becomes more diverse and that “our city’s entrepreneurial spirit has never been stronger.”

The mayor also took the opportunity to call upon the Province to keep Edmonton in mind as it tries to address a shortfall in revenue. “City building, I believe, is Province building,” he said. Later, Premier Jim Prentice referred to the comment and said, “I couldn’t agree more with that.”

Before the keynote began, EEDC showed their Build It Here video, highlighting the fact that it can be customized for businesses to use in their own materials.

Keynote

Brad Ferguson delivered the keynote address today, which you can read online. He began by talking about 2014, calling it “a great year”. There was a lot of euphoria in 2013 and throughout most of last year, so EEDC asked itself a key question:

“What should an economic development authority do when it is not in the job creation business? What should we do in the good times that will help us when the economic cycle turns?”

And with that in mind, the organization focused on ten themes throughout 2014 “that would strengthen our economy over the long term.”

  1. Direct Flights
  2. External Marketing
  3. Downtown Density
  4. Entrepreneurial Ecosystem
  5. Foreign Investment
  6. Event Attraction
  7. Regional Collaboration
  8. Unified Voice
  9. National Positioning
  10. Building the team at EEDC

Brad talked about the way EIA and EEDC are working together so effectively now, which resulted in the KLM flight. He discussed the new approach to tourism and marketing. He mentioned the big announcements that were made recently and said “more than anything else, 2014 will be remembered as the year of downtown.” He talked about the importance of event attraction, saying that big events “create a rhythm and a pulse and an energy that builds excitement and confidence.” He praised the mayor’s leadership in the region and on speaking with a unified voice. And he referenced the many newspaper and magazine articles that have been popping up across the country talking about Edmonton’s transformation.

Brad had a lot of praise for his colleagues. “I am extremely proud of the team we have built at EEDC.” He said the organization has reduced the portion of its operating budget that comes from the City, from 43% when Brad took over to 38% today. Brad said they’re on track to reduce that even further to 33% by 2017.

He then talked about oil prices and what they mean for the economy. If you want to understand the roller coaster, read this passage:

“If we look back over the last 7 years: In 2006-2007 this place was on fire, the world economy was expanding, oil prices were high, and everything was rocking. Until in March 2007 Bear Stearns collapsed and in September of that same year Lehman Brothers collapsed, the biggest financial collapse in recent history. The price of oil went from $140 to $40 (a $100 dollar drop) in six months than then settling around $58 which created a population boom scenario in Alberta and in Edmonton starting in 2010, 2011 and 2012 when the WCS (Western Crude Select) pricing traded at a significant discount, now known as the Bitumen Bubble, followed by 2013-2014 where the price rose again to $95-$100 range while the world started to rebound, and then half way through 2014 the price started to dramatically drop as the global economy started to pick up, which has us moving from a budget crunch which can be addressed into a competitiveness crunch that is more structural and tends to last for quite some time.”

He did not mince words, saying “our revenue model at the provincial level continues to fail us.” Brad said he sympathized with the Premier though, as he inherited this problem. Still, he cautioned that unless we make changes now, we’ll be experiencing the same revenue volatility in the 2020s, 2030s, and 2040s. “It’s time to be humble being from Alberta,” Brad said. “And it is time to have a serious conversation about our financial picture and to make incremental changes to our tax structure.”

Brad predicted that in Edmonton, the year ahead will be better than most people are predicting. He said we’ll outperform Calgary, and while the Province’s budget will capture the headlines, “there are many positives in front of us that cannot be forgotten.”

He urged attendees to do more than hope for a return to $100 oil prices. “We’re planning for a very competitive world and we need to operate with more intention than ever before.”

Q&A with Premier Prentice

After the keynote, Premier Jim Prentice joined Brad on stage for a fireside chat, sans fire. “This is a world class city, with world class leadership,” he said. He disagreed with Brad about the good times/bad times point-of-view, then said that “this year will be about leadership and confidence.” Premier Prentice predicted that 2015 will be a challenging year, but also a transformational one.

The Conference Board of Canada has predicted that Alberta will experience a recession in 2015, but Premier Prentice disagrees. “We are tough, we are resilient, we are entrepreneurial, we have the capacity to get through this, and we will get through this.”

At times the Premier seemed to be doing exactly what Brad cautioned against – hoping for a return to $100 oil. “The best solution for low oil prices is low oil prices, they will come back,” he said at one point. At other times, he was very clear that action was necessary. “People have had enough of the roller coaster,” he said. He has struck a new budget committee and confirmed that “everything is on the table.”

The Premier was also very honest about the challenges faced by the Province. “We have not done a good job with our public finances,” he said. “We have been living beyond our means.” He said that needs to change, and that “we are living on resource revenue that properly belongs to our children and our grandchildren.” He said the amount we spend in Alberta on health care “is not sustainable” and added that “we’re going to have to contain expenditures as we move forward.”

Premier Prentice did not shy away from the topic of taxation, either. Asked if the market is ready for a conversation about it, the Premier replied, “I certainly hope so.” He suggested that most Albertans probably don’t support the idea of a provincial sales tax, but did say that now is the time to discuss it. “We welcome the views of all Albertans on taxation,” he said. “Now is the time to speak up about this.”

Perhaps thinking ahead to the budget, Premier Prentice talked about what to expect. “First and foremost we need a fiscal plan than Albertans can look at and have certainty,” he said. And knowing that the roller coaster cannot continue, “it has to be a ten year plan.” He said that oil “may always be the family business” but said that diversification is important.

Given the opportunity to offer some closing thoughts, Premier Prentice said “you don’t win a bigger lottery than to be an Albertan.” He ended on an optimistic, hopeful note. “This is a remarkable province and we have a remarkable future.”

Extra Notes

EEDC Board Chair Barry Travers brought greetings on behalf of the board of directors, and introduced all of his colleagues. The event was hosted by Grant Ainsley and featured a giant Twitter wall powered by Freeman Audio Visual and SAM that received rave reviews from attendees. Everyone received a copy of “Navigating Your Economic Future in Edmonton: A Guide for Business Leaders”. The entire event was livestreamed by the Edmonton Journal, which you can watch here.

For additional context on this story, check out the following posts:

That's How Refineries Roll

Gas prices here in Edmonton are about $1.05 right now, and they were $1.18 in Vancouver on the weekend. Most people generally expect the prices to keep going up, perhaps quite dramatically in the near future. What would you do if you were an extremely profitable oil company faced with that reality?

Petro-Canada Refinery

If you guessed “burn excess gas and pollute the environment”, you’d be right!

That bright orange spot is from the flames atop one of the “flares” as they are called (I think) at a refinery near Edmonton. I believe most refineries will tell you that burning off excess gas is a common practice, though the flames I saw tonight were unusually large. They were burning at 6:30 PM when I drove by heading north, and they were still going at around 9:45 PM when I took these.

These photos are from the Petro-Canada refinery on the southeast side of the city. According to the company’s website, the site processes 135,000 barrels of crude oil per day (switching this year to 135,000 barrels of oil sands feedstock per day).

Petro-Canada Refinery Petro-Canada Refinery Petro-Canada Refinery Petro-Canada Refinery Petro-Canada Refinery

Please Canada, develop the oil sands of Alberta!

Post ImageI have long thought that we as a country should be investing more money in energy, including properly developing Alberta’s vast oil sands. Canada could become the most important region in the world for oil if we were able to extract it efficiently enough – and while it may not the best for the environment, it would certainly be a welcome change to have the oil capital of the world in a democratic, peaceful place for once. A new report from CIBC World Markets seems to support the idea of developing the oil sands, suggesting it will become the most important source of new oil by 2010:

Alberta will sit on one of the most valuable energy sources in the world by that time, and one of the few still open to private investment, said Jeff Rubin, chief economist at CIBC World Markets, the bank’s wholesale banking arm.

He added that conventional oil production around the world apparently peaked in 2004.

Energy companies are finding new oil, but most of it will come from non-conventional sources. Ocean oil rigs are the primary source of new oil today, with Alberta’s oil sands tomorrow, with expansion projects rivaling those of Saudi Arabia.

If we were able to properly develop the oil sands, without ceding too much control to the United States, Canada could become very rich, and the world would have oil for longer than is currently projected. This means two things would happen; first, the push for alternative energy sources may be slightly delayed and second, Canada could use its new wealth to invest in those alternative energy sources to be prepared for the time when no more oil can be extracted. If we sit back and choose not to increase production, the world will shift to other sources of energy more quickly, and we might one day be left with a bunch of useless oil, or at least, much less valuable oil.

One of the problems with the oil sands is that our technology is not good enough to efficiently extract the oil on a large scale. There has been some progress, but not enough. So how do we solve that problem?

  • We could just hope that Syncrude, Suncor, and the other companies involved figure it out.
  • The Canadian government itself could hire lots of researchers, engineers, chemists, whoever it takes, to try and improve the technology.
  • Canada could sponsor a research competition, kind of like NASA or DARPA’s popular programs in the United States. Challenge people to develop the most efficient, least harmful process for extracting oil from the oil sands. This is probably the best way to get some quick, meaningful innovation.

The point is that problems are not insurmountable.

There are lots of people who want Alberta to be the only one to profit from our reserves, but I don’t think there’s any reason that Alberta cannot be properly compensated and still have the entire country benefit. We don’t want Trudeau’s NEP, but we do need a national policy that recognizes Alberta and benefits all.

Unfortunately, our political parties do not seem that interested in developing such a policy. Vitality Magazine has a good round up of the “green” platforms the parties have announced for Monday’s election. There are quite a few mentions of alternative energy sources, but no mention of the oil sands. I think if we’re serious about alternative energy, we need to invest a lot of money into it, and what better way to obtain that much money than by fully exploiting the oil sands?

The oil sands offer our country very unique possibilities for the future. Let’s do something with the oil sands and take advantage of those possibilities!

(For more information, read these notes I took during a September 2005 conference that included some discussion on Canada, the oil sands, and the need for a national policy on energy.)

Funny Alberta Cheques

Post ImageI came across this bit of satire today, entitled “Government of Canada to Issue ‘Screw You, Rest of Canada’ Cheques to Each Resident of the Province”. Needless to say, it made me laugh:

Totally out of character, the Alberta Premier became testy when an insolent reporter from Upper Canada had the temerity to question him about Alberta profiting from high energy prices while Canadians are about to face enormous increases in their heating bills this winter. “Look! It’s our money! Get your grubby Central Canadian hands off of it!” barked the Premier. “We’ll do what we want!”

“Bring on some more goddamned hurricanes!”

Each and every Albertan will receive one of six different special ‘Screw You, Rest of Canada’ commemorative cheques in the mail in the next six weeks.

You really have to read the entire article, it’s very funny! The cheques themselves are quite a riot too!

Read: The Hammer

Big Oil Profits and Alberta

I
thought I’d highlight this rather interesting discussion on the big oil
companies and their profits taking place at Robert McClelland’s My Blahg. After describing the profits of Exxon Mobil, Royal Dutch Shell, and Petro-Canada (all up, surprise surprise) Robert had this to say:

Pricks. I say regulate them. And to hell with Alberta if they don’t like it.

And later in the comments he says:

Someone else: And the NEP worked really well last time didn’t it…

Robert: It worked great for Eastern Canada where I live and only care about.

I don’t know if he’s trying to be funny, or if he’s serious, but I
thought they were interesting comments nonetheless. I don’t think it’s
fair to blame Alberta for the current rise in prices. There are a
number of different factors, including speculators as explained by Mark Cuban back in September.

Not only that, but Alberta is using at least some of the profits from oil for worthy purposes. For example, we’ve stockpiled lots of Tamiflu and are ready to share.
We’re also investing more in our already top notch childcare
facilities. You can be bitter about the high cost of oil and the amount
Alberta profits, but it’s not like we’re actively spending money to
snub the other provinces!

That being said, I wish Alberta would take the lead and get a
national energy policy started. It would be wise to be proactive about
it, instead of defensive, I think.

MORE: One other thing I wanted to point out – I think Albertans have just as much reason to complain about oil prices as anyone else. The oil is extracted here, refined here, and doesn’t have to travel anywhere else, yet we pay around 90 cents a litre (as of today). How does that make sense? There are absolutely no distribution costs, especially here in Edmonton where we have a number of refineries, yet we pay just as much as everyone else.

Read: My Blahg

H2N-Gen

Post ImageHow would you like to make your car more efficient? I know I would, given the current cost of oil. We’ve seen prices drop a little in the last week or two, but nothing significant. That’s why the H2N-Gen looks incredibly cool:

Basically, the H2N-Gen contains a small reservoir of distilled water and other chemicals such as potassium hydroxide. A current is run from the car battery through the liquid. This process of electrolysis creates hydrogen and oxygen gases which are then fed into the engine’s intake manifold where they mix with the gasoline vapours.

It’s a scientific fact that adding hydrogen to a combustion chamber will cause a cleaner burn. The challenge has always been to find a way to get the hydrogen gas into the combustion chamber in a safe, reliable and cost-effective way.

Just how much better does this device make your fuel consumption?

Most internal combustion engines operate at about 35 per cent efficiency. This means that only 35 per cent of the fuel is fully burned. The rest either turns to carbon corroding the engine or goes out the exhaust pipe as greenhouse gases.

The H2N-Gen increases burn efficiency to at least 97 per cent, Williams said. This saves fuel and greatly reduces emissions.

That would be some pretty significant savings! Savings that would make you go, “sign me up!” And the really great thing about it is that no hydrogen is stored on board – it is “just in time” manufactured.

Some other information on the device: it’s a Canadian invention, it is supposed to last ten years, can be attached to any internal combustion engine (diesel, gasoline, propane), and should cost around $7500. If this thing is for real, it could really change up the way things work – both the oil and vehicle industries would be greatly affected.

Read: Montreal Gazette

Locking gas caps!

Post ImageHow can you tell that gas prices are far too high? Well, you might spit coffee all over the dash when you drive up to the pump and see the price, or you might be checking prices on one of those converters that makes your car burn restaurant grease as fuel. Or, you might even be ordering a locking gas cap:

The word from Pittsburgh is that auto parts suppliers are rapidly selling out of locking gas caps, which were originally invented in the 30s because of gas thefts during the Great Depression. Buyers are reporting their gas tanks have been siphoned, or that they want to head off potential siphoning due to ever-rising gas prices. Some stores are having difficulty getting more units in stock from manufacturers.

There was a similar little article in today’s Dose too. Are people really siphoning gas, or is this a little bit of Pimp My Ride? I mean gas prices are so high, what’s another few dollars on a locking gas cap right?

Read: Engadget

Edmonton man addicted to updating gas prices

Post ImageWhen I posted about the price of oil on Tuesday, I linked to EdmontonGasPrices.com as a resource for checking out where the cheapest gas is in the city. Then today, reading the Journal, I came across an article talking about Scott Widney:

It’s only noon, but already Scott Widney has earned 450 points as a tipster for GasBuddy.com, a gas-price tracking service that posts good deals on fuel for more than 170 North American cities.

Using the screen name oilmaster, the 46-year-old logs into local gas-price tracking site edmontongasprices.com and reports the price changes at six south-side gas stations about three times a week.

“It’s pretty addictive,” he said Tuesday, the day gas prices at most Edmonton stations shot up to 102.9 cents per litre.

Whatever floats your boat, I suppose! Granted, he does get entries into contests for free gas for every 150 points he earns, so it’s not like he gets only satisfaction out of the deal.

Though I have always thought GasBuddy and EdmontonGasPrices.com were kind of a funny concept. If you found cheap gas, wouldn’t you instinctively want to keep it a secret? To keep it all for yourself? Maybe I’m just selfish. The other reason I thought it was a funny concept is that it allows gas stations to see how their competitors are pricing gas around the city without having to make some phone calls or (gasp!) drive around. Seems to me it would be easier to raise your prices just because someone else did.

Read: Edmonton Journal

Oil prices will go higher

Post ImageDriving to work earlier today, I noticed that some gas stations have raised prices again, this time to 102.9. I have never seen gas prices so high, and I never thought I would. I remember a few years ago when a litre of gas cost less than half what it does today. And the worst news of all? Oil prices are going to keep rising.

If you think I’m joking, read this Economist.com article. It does an excellent job of explaining things:

So far, however, the effect of higher prices has been surprisingly muted. Gas-guzzling America has seen GDP grow at a brisk clip, far outstripping many of its daintier peers in the rich world. Though high oil prices are contributing to America’s surging (and unsustainable) current-account deficit, they do not seem to be worrying consumers, who have kept on spending.

In part, this is because the oil-price records are an illusion, brought about by inflation. While nominal prices are at record levels, in real (inflation-adjusted) terms they are still well below those seen in the wake of the 1979 Iran hostage crisis, when the cost of a barrel of oil hovered around $90 in today’s dollars (see chart). Consumers are better-off now—in 1980, the median personal income in America was $16,800 (in 2003 prices), versus $22,700 in 2003—and economies are more fuel-efficient. Both of these things should cushion the shock of higher prices.

There are other factors to consider too. During the hostage crisis, OPEC deliberately kept prices higher than the market could bear – but it backfired. We became more fuel efficient as a result, something OPEC would not want to do again. There’s a theory though, that they have lost the control required to keep prices artificially high anyway:

With the exception of Saudi Arabia, its producers are pumping as much as they can—and Saudi excess capacity is in heavy crude that is harder to refine into the cleaner fuels demanded by rich countries. OPEC made a great show of raising its members’ combined quotas to 28m barrels per day (bpd) in June. But thanks to rampant cheating, they were already pumping at least that much, and possibly as much as 30m bpd, making OPEC’s promises little more than a carefully staged bit of public relations.

There is an excellent Wikipedia article covering the current increase in oil prices, complete with breakdowns of demand and supply, and some excellent charts. It too, says the worst is yet to come:

While oil prices are considerably higher than a year ago, they are still far from exceeding the inflation-adjusted peak set in 1980.

There are lots of people talking about the gas prices, obviously. The number eight search on Technorati right now is gas prices. And over on Flickr, you can check out some of the prices around the world as people take pictures and post them.

Here in Edmonton, you can keep an eye on gas prices at EdmontonGasPrices.com. And if you think it’s time to park the car, the ETS website is http://www.takeets.com.

Read: Economist.com