Commodity Economies

By Kellyn Brown

There is an ongoing debate north of the border over royalties the government receives from oil and gas, the prices of which have recently plummeted and coincided with a weakening currency and struggling economy.

Rachel Notley’s election to premier of Alberta in May marked the first time in more than 40 years that the Conservative Party has lost control of a province considered the conservative heartland of Canada. And part of Notley’s and the New Democratic Party’s campaign included reviewing how Alberta benefits from its natural resources.

This has companies operating in the vast oil sands “spooked,” and critics have encouraged Notley to delay the review until after prices have rebounded, or ditch it altogether. Instead, she says it will go forward, although softening her language and emphasizing she is “not going to do anything right now when we have prices so low that would undermine the ability of the industry to recover.”

Notley is in an unenviable position. Economists say Alberta is in a mild recession this year. Meanwhile, the new premier must find ways to cut spending and raise revenue.

“Alberta has certainly witnessed these dips in commodity prices before and survived,” Gary Mason wrote in The Globe and Mail. “But it’s the first price panic that has occurred with a centre-left government at the controls, one that has promised to bring in all manner of environmental and economic reforms that have only added to the worries of those inhabiting the oil and gas towers of downtown Calgary.”

He added that he thinks the collapse in oil prices will result in a budget deficit of around $3 billion, although others have predicted twice that amount. In turn, lower commodity prices have weakened the Canadian dollar to about 75 U.S. cents, which is especially concerning among Flathead Valley retailers who rely on the customers who use it.

Notley’s biggest challenge is to reinvent the Alberta economy to rely less on a key commodity. Cheap oil, which is selling around $40 a barrel (less than half the price as in recent years), may be around for a while.

It could be far worse. Countries reliant on commodities are susceptible to boom-to-bust economies. China’s tumbling stock market and slowing growth is reminding the world of that, and nowhere as loudly as in Brazil.

That country saw its economy surge on the back of commodities. Brazil exported iron ore, soybeans, beef and more to China, increasing annual trade from around $2 billion in 2000 to $83 billion in 2013, according to the Wall Street Journal. The boom helped Brazil land the World Cup in 2014 and the upcoming 2016 Olympics. Now, it appears, the ride is over.

Brazil’s stock market has lost more than 20 percent of its value over the last year, its economy is shrinking, and antigovernment demonstrations are commonplace. As Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, told the Journal, “Unfortunately, the history is that commodity-dependent economies do not catch up with the U.S.”

Alberta, on the other hand, is better positioned. The oil slump will hurt, but the low Canadian dollar could boost manufacturing exports. Still, a budget fight looms up north this fall, where Notley’s party and its opposition are openly disagreeing over whether public services should be trimmed to make up for part of the shortfall. And part of that budget will include predicting future oil prices, which, it appears, no one can do.       

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