Whither Alberta: will to change or more of the same old rollercoaster?
Posted June 10, 2010 in Opinion & Analysis
OPINION
By Michal Moore
As modern political entities go, Alberta is the poster-child of what American economist Kenneth E. Boulding called the “cowboy economy.” The province is simultaneously a leader poised to venture into an unproven, uncertain and potentially dangerous future, and a follower perennially acclimated to relive a rollercoaster past.
The transition from rural-agrarian or single resource-dominated economies is never easy. But it can be made all the more difficult when obdurate and defensive political and economic empires resist the changes necessary to lead, rather than simply hold on to long-established (not necessarily current) principles and power.
Many political pundits have commented on the propensity to create long-lived, conservative (small ‘c’) political empires in Alberta. Given the nature of the economic, physical and political landscapes during the past 30 years, this should come as no surprise. The population change in Alberta has been dramatic and steady, with a consistent depletion of the relative weight of the rural base in favor of urban development. That population now exceeds 3.6 million people.
The economy in Alberta is uniquely “Western” in outlook, both in its robust potential to generate revenue as well as attraction for new residents. From the landscape to the underlying resources, the province is really a microcosm of the modern political state, expanding but governed by a dated and minimally responsive political system. To be fair, there is no groundswell of public opinion that would undermine this position.
However, dissatisfaction with current policy direction in Alberta is beginning to emerge in public opinion polling. Threatened lawsuits by the City of Calgary over promised provincial government infrastructure funding that has been put on hold highlights the tension. Alberta represents the tyranny of riches and the tragedy of complacency and over-confidence. The province has the potential to dim a shining star by failing to anticipate and embrace a future that doesn’t look anything like the past.
This is a resource-rich, resource-shackled economy. The government revenue structure is built around the expectation that planning for the future simply involved (or involves) good forecasting around the demand for and supply of oil and gas products. At its most simplistic level, Alberta planners assume changes in the levels of demand for their resource, but not a structural shift in the nature of that demand. It is no secret that the Alberta economy has been subject to economic volatility, with dramatic cycles of boom and bust. Because of the limited diversity of an economy divided between agriculture (mainly in the southern region) and hydrocarbon extraction (mainly in the north-central region), it is no surprise that without planning and intervention, Alberta’s economy will demonstrate low resiliency and shock resistance when global or even meta-regional demand changes. This is commonly known as the “resource curse” – blessed when demand is high, cursed when demand changes or diminishes.
Markets for agriculture and energy products are in a volatile state of flux all over the world. The ability of competitive regions, governed by different standards of environmental, labor and capital policies, to capture market share is dramatic and often moves at breathtaking speeds. Existing market players generally know and understand this quicksand shift in production and earnings potential, changing as necessary to remain competitive.
The same is rarely said for policy making and regulatory institutions. Alberta is generally no exception to this rule, but the opportunity to capture the potential in these emerging trends is impressive and provides a point of comparison about what should happen in Alberta versus what is likely to happen. “Whither Alberta?” is then more than a simple hypothetical wondering; it is a point of departure that will define the quality of life and economic returns for many decades to come.
What should happen
Given Alberta’s rich resource base, from water to agricultural soils to a diverse mix of hydrocarbons, the clear objective should be to continue to extract, utilize and maximize the sale of the resources available to Albertans. However, the markets for each of these (including water which is an element of the production of all the other goods cited here) are generally export based. This is a continuing opportunity for maintenance of market share as well as expanding into new markets.
The caveat is that the standards used to judge the goods available for export are in a state of flux. Witness the concerns over carbon content standards for oil sands bitumen, unconventional natural gas or coal-based electricity. The fact that these standards, and by implication the markets that they represent, are changing simply means there is an opportunity to create new value-added products that can lead as well as respond to these changes.
The reality is, however, that Alberta’s economy has shown little appetite for upgrading the nature of the products sold, preferring bulk quantity to value-added quality. In addition, the reluctance to explore exports in key emerging markets of electricity and water means that critical investment capital may be unavailable when economic conditions in the region are tight.
Alberta has a highly educated society, perhaps the most urbane and sophisticated in Canada. We have a strong and robust cities and generally good intra-provincial infrastructure including roads, utilities and public education. In the past, we have successfully met the issues of wealth redistribution through an egalitarian tax system and a strong heritage fund created to save a portion of our resource wealth for tough times.
To be successful in the future, these approaches must be revisited and planned for at least four decades forward. This means a committed policy framework to gain appropriate tax and royalty returns for publicly owned resources, and the foresight to invest in infrastructure that will support consistent and not ‘peaky’ capital investment. Letting the market solely control the pace of land lease distribution will inevitably lead to overzealous development at a pace which will overshoot and contract outside the range of real market demand. The right posture for the use of public goods is to adopt consistent long-term development strategies, including tax policies, in order to maximize the potential returns while minimizing the negative effects of the extraction of a single dominant resource.
Given the dominant role of oil and gas resources in Alberta, and the inevitable advent of carbon control standards, it makes sense for the province to adopt aggressive control standards that can be tested and perfected here, in effect setting the standard for other jurisdictions to follow. Alberta also has access to clean sources of energy currently untapped today, in far northern water systems such as the Slave River, as well as the ability to produce cleaner electricity from existing sources using carbon control technologies and more efficient generation based on natural gas turbines.
Investment in these technologies and systems could help make the province net carbon neutral over 20 years. Emphasis on hydro-based electricity could also develop a strong market in clean energy offsets or “attributes” which could be traded on regional, continental and world markets.
Given the rich water resources, Alberta could pioneer the world of water license trading, balance charges and water conservation design. In effect, the province could provide the laboratory for the proof of concept in future water markets and regulation. When water pricing is discussed in the future, whether exports and export markets were included or not, the standards set by Alberta could influence policy and regulation worldwide.
In this same arena, the world of efficiency, whether in terms of land-use allocations for development or energy use or transportation, could be dominated by the province. The engine of growth here is robust and capable of sustained, substantial investment. By insisting on high-quality standards, the value implied by future development can be enhanced simply by setting and consistently enforcing the highest level of expected performance in our built environment.
What is likely to happen
Bankers are fond of saying that you “can’t push on a string.” We can’t manufacture the future that we would like to have, although I firmly believe that the very act of visualizing the future as it is evolving today will help frame some of the choices that could provide opportunities to change.
The government structure in Alberta is not likely to change, not likely to become more egalitarian and populist in nature. Nor is it likely to reflect the strong growth and demand of urban centers until forced to do so. This means that the rural caucus will proceed with a business-as-usual approach designed to preserve, as long as possible, the rural dominance of finance, cultural affairs, infrastructure development and education focus.
The results are inevitable. Eventually a plebiscite or redistricting proposal which enjoys overwhelming popular support will create an urban caucus that dominates the political landscape and will reflect a relatively more liberal (small ‘l’) bias and cosmopolitan interest. This extends to the world of regulation, whether in terms of consumer protection or smart long-term investment in a diverse power mix, part of which will be enabled by appropriate investments in transmission and utility rights of way.
This was the outcome – denied for decades – in 1964 in California. A referendum established the dictum of one-person, one-vote. Overnight the rural caucus was on the street and, denied for so long, the retribution from the urban interests has never let the rural areas recover. History has a way of repeating itself on these issues. Ignorance of brewing discontent can be dangerous and self-consuming.
In economics, Alberta’s political leaders are likely to continue to short-change the future by refusing to lead public opinion on the potential benefits of changing to upgraded and value-added goods. The list is long, including electricity, agricultural products, forestry and “clean energy” attributes such as carbon credits for hydro or unconventional natural gas supplies.
The upshot of all this is likely to be a world that is accommodated rather than planned. That world includes: minimal public transit development; lagged-far-behind residential and commercial development; a tax and royalty structure that is inefficient not only in terms of incentives but realistic revenue generation; and an unnecessary but inevitable upheaval as rural and urban political machines clash in the transition period. This is likely to be a period of opportunity lost, perhaps never regained.
I don’t know if there is a world of electric cars coming down the road that will displace the need for liquid fuels. I don’t know if water will be so valuable as to make it a more effective trading commodity than hydrocarbons. I don’t know if electricity exports could supplant the existing resource-based economy one day. I don’t really know if an urban capital center for the western part of Canada could be grown effectively from a Calgary base.
What is clear, though, is that the heretical nature of these and other similar questions belongs in Alberta’s public debate, where open discourse is encouraged, and thoughtful foresighted public policies are shaped. The opportunity to avoid a return trip on a boom-bust rollercoaster is here, and there is enough wealth to make it happen. The only thing missing is the will to change.
Michal Moore is an economist, Senior Fellow at the Institute for Sustainable Energy, Environment and Economy at the University of Calgary, and a former California energy regulator. This column first appeared in the June edition of EM magazine, published by the Air & Waste Management Association.
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