indicatorThe Owl

We need to diversify the economy part 2

The quest for economic diversification in Alberta rests on the fear that the golden goose’s days are numbered and the fact that her egg laying is not as consistent as we would like.

By ATB Economics 28 May 2020 2 min read

In yesterday’s Owl, we explored the importance of the oil and gas sector to Alberta’s economy and raised the question of why, given that we have this “golden goose,” we have been preoccupied with the idea of economic diversification for going on five decades.

The answer comes down to the fear that the golden goose’s days are numbered and the fact that her egg laying is not as consistent as we would like.

Before the vast reserves trapped in the oil sands became a viable source of new production and fracking technology greatly expanded the amount of recoverable natural gas, we paid a lot of attention to the “non-renewable” aspect of our oil and gas resources. The idea was that one day the golden goose was going to stop laying eggs so we better come up with something to replace it.

Mixed in with this was the idea that extracting oil and gas was somehow inferior to the supposedly more sophisticated economic activities such as manufacturing. We were the lowly “hewers of wood and drawers of water.” 

Then there was the volatile nature of the oil and gas industry and the boom-bust cycle it generated. A more diverse economy was sought because it would smooth out these ups and downs. (The ongoing nature of this problem is evinced by the oil price crash that triggered the provincial recession of 2015 and 2016.)

Given all this, the idea was to make our economy look more like Ontario’s manufacturing sector. This would mitigate the boom-bust cycle created by our reliance on oil and gas, prepare us for the day when we run out of the stuff and grow the economy to boot.

Today, the fear that we will run out of oil and gas has been replaced by the fear that efforts to reduce carbon emissions will stymie the sector’s future. (This applies more to oil than natural gas with the latter seen by many as a key “transition” fuel going forward.)

On the one hand, the world might go on consuming lots of oil and gas for decades to come (though taking full advantage of this assumes we have the pipeline capacity to get our oil to market). On the other hand, a combination of technological change (e.g., cheap electric vehicles and extensive charging infrastructure) and public policy action could push consumption down and permanently reduce the value of our golden eggs. This, combined with the boom-bust problem, has renewed the call for economic diversification. 

Tomorrow’s Owl will explore why diversifying an economy is easier said than done.

The price oil has gone up and down over time.

Oil prices are notoriously volatile.

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