Sitting on over a trillion barrels of bitumen, Alberta has staggering oil riches, making this western province vital to the Canadian economy. However, why does the rest of Canada have such high stakes in the tar sands of Alberta?
Kevwe Yerifor is the Chief Investment Officer for Capital Intell and a member of the Investment and Wealth Institute USA. He holds an MBA from the University of Bradford, UK and certifications in Investment Management from the Yale School of Management.
He recently took the time to discuss Alberta oil and the Canadian economy, of which some of the highlights are shared below.
When it comes to oil, says Kevwe Yerifor, it’s all about the numbers. Whenever global oil prices go up, oil-producing regions rejoice as the money starts to rain. When prices fall, there’s a palpable foreboding in the air surrounding such oil-producing regions.
Alberta is not immune to this ebb and flow of global oil prices. While this swing in prices affects Albertans directly, the wider Canada also feels the effects of these price movements. Currently, the province contributes around $13 billion annually in taxes.
Indirectly, Alberta contributes close to ten times that in direct and indirect payments to companies across Canada. When it comes to oil prices, when Alberta sneezes, Canada is likely to catch a cold.
While Canada has extolled the virtues of weaning itself off Alberta’s golden teat, when prices are up, no one can resist the urge to suckle.
Canada’s economy is largely dependent on exports to its southern neighbor, the United States. Currently, Canada runs a small trade deficit of $2.38 billion (USD), mostly cushioned by the 3.2 million barrels of crude sent to the US every day.
A large percentage of this oil originates in Alberta. However, says Kevwe Yerifor of Capital Intell, as US-China trade wars intensify, Canada needs to take a neutral stance, so both parties continue buying its oil.
This stance is made difficult by increased oil production within the US, seen as an attempt to insulate the US economy from Chinese influence. With increased production, there may be reduced need for oil coming in from the north.
This leaves Canada in a precarious situation especially because China is offering to purchase more of Alberta’s oil, if only Canada agrees to the building of a pipeline from Edmonton, Alberta, to the west coast port of Kitimat, British Columbia.
Having just concluded a local election, Alberta is hoping for a new dispensation that sees it benefit more from its black treasure. However, Alberta has historically been an economic gunship, sending salvos out to anyone not willing to toe the line.
The incoming premier knows this well. Even before his inauguration, he has fired warning shots to the neighboring province of British Columbia, warning them of oil cutbacks if they do not ratify proposed pipelines passing through their territory.
These local dramas are a pain to the national government of Canada, more so because any slowdown in production directly translates into fewer dollars being deposited in state coffers.
The state government also knows it cannot arm-twist Alberta – it’s still smarting from a standoff with Alberta in the 1970s when then-premier Peter Lougheed curtailed production to such an extent that the Canadian government had to come to the negotiating table.
For the Canadian economy, what happens in Alberta does not stay in Alberta. The rest of Canada can only hope that the incoming premier will do more to benefit the entire country and not just the Albertan economy.
Kevwe Yerifor says that any conversation about Alberta oil devolves into a conversation about the success stories of Texas and Norway. Albertans are so used to this comparison; they have a name for it, “Norwailing” – wailing or lamenting about why Alberta is not more like Norway.
This comparison is especially stark because Norway’s sovereign wealth fund, set up twelve years after Alberta’s has over a trillion dollars under management, while Alberta’s Heritage Fund is a paltry $17.6 billion.
The argument is Texas and Norway have managed to diversify away from oil while Alberta is stuck on oil. While consecutive local governments have tried to stimulate the non-oil economy, rises in oil prices have always inevitably scuttled such efforts.
For the wider Canadian economy, a move away from oil would potentially mean a more stable Alberta, and perhaps one that can do more to extract more sustainable wealth from its tar sand riches.
Conservative estimates place the number of jobs created by the Alberta oil industry at about five hundred and twenty-eight thousand direct and indirect jobs. What’s more, these jobs are spread across all Canadian provinces and not just Alberta.
As such, says Kevwe Yerifor, the Albertan economic microcosm can have a massive ripple effect on overall Canadian jobs if negatively impacted.
This level of economic influence explains the importance of Alberta, especially on a national platform. For instance, in 2017, premier Justin Trudeau announced to the world Canada’s commitment to developing the oil sands of Alberta, a level of pragmatism that surprised Albertans.
Although seemingly generous, the real message here, says Kevwe Yerifor, was that Alberta is central to Canada’s economic plans, and the central government is willing to play any tune to protect and promote its golden goose.
Before Alberta and the oil sands, Canada was contented with being a sleeping giant – confident and comfortable in its corner of the world. The current debate surrounding Alberta, and the massive oil reserves under its boreal forests has shaken Canada out of its slumber.
For a moment now, Canada sees a future where it can use its oil riches to transform into an economic juggernaut able to negotiate, as peers, with the likes of the US.
However, the challenges of realizing such a future, no less because capitalism has given up on hydrocarbons as the world moves on to renewable energy, remains a fleeting dream that’s getting ever harder for Canada to grasp.