Boom, Bust or Status Quo

1
Boom, Bust or Status Quo?

• IPAC Edmonton Region Conference
• April 3, 2008
• Glenora Club, Edmonton, Alberta
• Dr Michael Percy
• Alberta School of Business

2
The Short Presentation

• There will be a bust the only issue is whether
  there is a hard landing or a soft landing

3
The Long Version

• The dynamics of booming economies every boom
  begets its bust.
• Drivers of the Alberta Economy good news we are
  driven by capital investment bad news we are
  driven by capital investment
• Catalysts for the down turn things that will go
  bump in the night

4
Attributes of Current Expansion

• Longest continuous expansion in Alberta history
  can date it from 1993
• Little evidence in Alberta of Dutch Disease
  notwithstanding a dollar near parity and rising
  nominal wages relative to the rest of the country
• Different drivers over life of expansion
• Export-driven consumer driven then investment
  driven
• Current expansion quite different in context to
  expansion and collapse 1973 1981-82 period
• Macro context currently quite different in terms
  of nominal interest rates and inflation
• Key similarity importance of capital investment
  as share of real GDP

5
Whither the Economy?

• We not only concur that growth in the Alberta
  has passed its peak in the current cycle but that
  the risks of a hard landing have been rising (in
  our view they are as high as 20-25). Yet we
  stick by our recent view that the economy will be
  able to pull off the elusive soft landing, with
  real GDP growth still holding at 3 per year on
  average in 2007 and 2008 and nominal income
  growth expected to remain the positive territory
• (TD Economics Provincial Economic Forecast,
  September 28, 2006, page 3)

6
Percentage Real GDP Growth(1997 chain linked
dollars)(Statistics Canada 13-016-XIE)
7
Gross Fixed Capital Formation and Inventories as
a share of Alberta GDP(Chained (1997)
dollars)Statistics Canada 13-016 XIE
8
Inventory of Major Alberta Projects, February
2008(projects over 5 million recently
completed, currently under construction or are
proposed to start within 2 years)

• Value of Projects 257.2
  Billion
• Oilsands 165.8
• Infrastructure 17.2
• Institutional 13.1
• sub-total 196.1
• (76.2)

www.alberta-canada.com/statpup/albertaConstruction
Projects/)
9
Net Migration to Alberta
10
The Dynamics of a Booming Regional Economy

• Its all about how a real shock generates an
  increase in real demands ?leads to capital and
  labour flows into the region ? then expectations
  based on inflation and expected returns begin to
  drive economic decisions ? at some point
  expectations driving investment are not realized
  and excess capacity and unemployment begin to rise

11
Critical Drivers

• Expectations regarding energy prices
• International economy
• Energy security of supply
• China
• United States

12
Policy Environment Facing Oil Sands

• Generic fiscal regime
• Managing regional growth
• Wood Buffalo
• Capital Region and upgrader alley
• Oil as the new tobacco industry social
  licence
• Bitumen Exports
• Environmental issues
• Carbon emissions, storage and sequestration
• Water
• Natural gas

13
Oil Sands Break Even

• Sharp rise in break even in light of
• Rising material costs
• Rising labour costs and skill shortages
• Conventional wisdom now says 55 barrel WTI is
  now break even

14
Why Soft Landing Still More Likely?

• Continuing positive impact of NFTA
• Impact of operating expenditures of oil sands
  plants currently in operation
• Continuing focus on energy security of supply
• Balance sheets of business and provincial
  government