A province poised for leadership: gifted with resources, Alberta moves toward centre stage.

Is Alberta the wasteful, profligate, polluting, redneck and small-minded place as some Canadians in the centre and east of the country portray it, especially around federal election time? And if this view, as I believe it is, is inaccurate, how are Albertans likely to behave as the balance of economic power in this country continues to swing rapidly in their province's favour?

Obviously no one can give a full answer to such loaded questions, but I'll give it a try. I was born and raised in Alberta, a Calgarian, moved to London, England, to attend university and thence to Ontario for 30 years, after which I returned in 1995 to Edmonton, the home of the University of Alberta. As an economist and educator who has watched this province develop from both outside and in, I can paint a portrait of Alberta's economy and quality of life that may not be definitive, but is at the very least closely observed and based on considerable reflection.

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It all hinges on oil, and in particular on the barely tapped resources of the oil sands. When I returned to Alberta twelve years ago, I simplistically presumed that Alberta comprised two economies: the "old" one, essentially resource and manufacturing based, and the "new" one based on information technology, biotechnology, advanced materials, nanoscience and established service industries. Alberta, I thought I understood, needed to focus on the new.

Fortunately, within a few weeks of my return, several leading Albertans convinced me to gain a more nuanced perception of the principal drivers of Alberta's economy and their effects on its people and natural resources. Thus began my visitation of the diverse sectors of the Alberta economy for up to ten days each year. Here is what I discovered.

The potential of the oil sands, recognized by the early explorers travelling the Athabasca River, who observed the heavy oil simply oozing out of the sandy river banks, has always been seen as significant by Albertans. Karl Clark, a researcher at the University of Alberta, developed a process for separating the oil from the sand as far back as the 1920s. In the 1970s, not long after Suncor's first oil sands plant began production, the Albertan government established the Alberta Oil Sands Technology and Research Authority (AOSTRA), under whose aegis academic and industrial researchers were able to start reducing production costs from an initial range of $40 to $50 per barrel to their current range of $22 to $28 per barrel.

As conventional oil and gas output in North America has declined and worldwide demand for oil has continued to grow voraciously, the potential gains from the oil sands have become immense, especially as the estimated size of technologically and economically recoverable reserves has kept rising. This estimate is now in the order of 280 to 300 billion barrels, making the oil sands the world's largest remaining known reserve of oil. As long as market prices continue to exceed the oil sands' production costs per barrel--and costs are likely to fall still further--their full exploration is sufficient to underpin a red-hot Albertan economy for the next 25 to 50 years. This is no old economy we are talking about, but one of the main foundations of the entire Canadian economy for decades to come, through elevated federal tax revenues, high-wage employment opportunities for many workers and the economic benefits to all those in the supply chain feeding the massive construction activity in Alberta.

There clearly are major challenges facing the oil sands and heavy oil industries, including the reliance on natural gas, on water use, on the production of carbon dioxide and similar gases, on the production of tailings and, of course, on the cyclical market for oil. While these industries have substantially reduced their emissions per barrel of oil produced, the huge increases planned in total number of barrels produced presents all of us with the challenge of finding methods of producing synthetic crude oil that substantially reduce these attributes. A possible analogue is the newly developing clean coal technology via "thermo-energy integrated power systems," which holds just such a promise of zero pollution for the burning of coal. (1)

Given these new challenges, it is instructive to consider whether Alberta learned anything from the last oil boom. Only part of the answer is tied to that now famous Albertan institution, the Heritage Savings Trust Fund. (2) When the fund was set up by the Lougheed government back in 1976, the intention was to set aside a third of provincial royalties to build up a publicly controlled fund to help ease the shock of cyclical downturns in the provincial economy while also helping to diversify the Albertan economy. Significantly, management of the fund was kept in Cabinet hands, so that investment decisions were often determined as much by political as by economic criteria. For example, until 1982 some of the fund was lent to other provincial governments with relatively attractive repayment provisions, to help stem criticism in the rest of the country concerning the wealth that Alberta was rapidly gaining from its oil reserves. Much of the rest of the fund was invested within the province, with an emphasis both on social investment projects and on initiatives explicitly designed to diversify the Alberta economy.

Much greater impacts on the economy were the result of deliberate actions to diversify it--most unconnected with the Heritage Fund. For example, the Food Processing and Development Centre was set up in 1984 to help ensure that refinement of agricultural products took place within the province. In the forestry sector, diversification plans centred on the pulp industry. With provincial encouragement, the Procter and Gamble pulp mill, now owned by Weyerhaeuser, was opened in Grande Prairie in 1972, and this was followed by a further expansion in the number of pulp mills in the late 1980s and early 1990s. New products such as oriented strand board were also introduced, revolutionizing the building supplies industry, with much of the work carried out by the provincially funded Alberta Research Council.

Partly as a result of innovations such as these, the Albertan economy did diversify during the last oil boom. Between 1973 and 1984, the share of manufacturing and services in the Albertan economy increased, although much of the expansion, not surprisingly, was associated at least indirectly with energy. For example, in manufacturing it was the petrochemical industry that expanded most rapidly, while in services it was areas such as transportation, again much of it directly related to the burgeoning oil industry. (3)

There were, however, important lessons to be learned from the policies that were in place in the 1970s and early 1980s. Once the oil boom ended in the mid 1980s, criticism of the Heritage Fund and its investment priorities became pronounced, especially once the provincial government began to start racking up deficits. At this point the rationale behind the Heritage Fund seemed to grow more tenuous. The political oversight of the fund added to these uncertainties, as did the fact that its goals had been kept vague, so that it was hard if not impossible to gauge its year-on-year performance. What was the Albertan government doing investing in all sorts of pie-in-the-sky projects (a common disgruntled refrain from voters, including many Conservative supporters), when the provincial coffers were moving into the red? This controversy, among others, clouded the tenure of Lougheed's successor, Don Getty, who had taken over as premier in 1985, just as the oil patch bloom was beginning to fade. By the time he stepped down in 1992, to be replaced by populist Calgary mayor Ralph Klein, the popular consensus on what role the Heritage Fund should play in the Albertan economy had undergone a sea change.

Opinions of political commentators may differ on the direct democracy initiatives that Klein spearheaded during his time as premier, but there is no doubt that his governing style struck a deep chord with the Albertan electorate. On the issue of the Heritage Fund, the Klein government surveyed Albertans in 1995 with the catchily titled "Can We Interest You in an $11 Billion Decision?" Not surprisingly, voters were interested. The popular consensus that arose from this consultative process was that the fund should move away from social investment projects and diversification schemes, and should instead start emphasizing long-term investment returns. By 1997, the fund's management was restructured along these suggested lines, with strict investment-based criteria and with transparent performance targets.

So the fund is now a very different beast than it was at the end of the last oil boom. Its purpose is now to make money, and this is exactly what it has been doing, thanks to a portfolio of international equities and debt instruments. This summer one of Canada's best-known economists, Jack Mintz, was appointed to head a commission to evaluate the management of $40 billion in funds, including the Heritage Fund, controlled by the Alberta government. This shows that refinements in the investment of the province's wealth are bound to continue.

Still, probably the most important lesson learned from the last oil boom and its National Energy Policy-influenced aftermath is the enormous potential of government-funded research, in partnership with industry and Alberta's universities. However the economic returns to AOSTRA-led research on the oil sands are divided, they are enormous: in the order of hundreds of billions of dollars; the Heritage Savings Trust Fund pales in comparison. Mindful of this, Premier Klein added huge amounts to the Lougheed-established Alberta Heritage Foundation for Medical Research and he established two further, generously funded endowments: for science and engineering research and for advanced education.

But if one were to pinpoint a single new initiative comparable in importance to AOSTRA, it would be the monumental National Institute of Nanotechnology in Edmonton. Jointly funded by the National Research Council of Canada, the Alberta government and the University of Alberta and situated in the heart of the U of A campus, the institute is targeted to be one of the world's top five centres of nanoscience and technology.

Meanwhile, as far as diversification is concerned, the general view among Albertans now seems to be that the provincial economy is able to survive any cyclical downturn in resource markets. This viewpoint is based on some compelling arguments--not least the fact that the Albertan economy's sectoral composition is far different than it was in the mid 1980s. While the energy sector represented more than 36 percent of provincial gross domestic product back in 1985, it is now down to 28 percent. Manufacturing and services have both grown to take up the slack. As for agriculture, it is now a minor part of the Albertan economy at just 2 percent. (4) If the Albertan economy ever was just oil and wheat, with everything else a secondary add-on, those days are now long gone.

There are other indications that the Albertan economy is better positioned now than it was in the mid 1980s to weather any cyclical storms. Despite, or perhaps because of, its attractive tax climate--with the lowest overall taxes in Canada and no provincial sales or payroll taxes--provincial net assets (the opposite of provincial debt) now stand at 14 percent of the province's GDP. This compares with an average provincial debt of just under 25 percent for Canadian provinces as a whole. Many economists now believe that, fiscally speaking, the Albertan economy is not just in the strongest position (by far) of any Canadian province, but that it outmatches every U.S. state with the possible exception of oil-rich Alaska. Moreover, the province's current advantageous ranking, which took so much to accomplish (most particularly through the highly painful spending cutbacks that were engineered by the Klein government in the mid 1990s), is not one that Albertans will relinquish easily.

So while there were lessons to be learned from the last oil boom, Albertans were more than willing to take these lessons into account in the way provincial policies were adjusted during the past decade. Of course, there are certainly new challenges to deal with. The demands of explosive population growth have also characterized this current oil boom. In fact, during Premier Klein's tenure, the population grew by almost 40 percent or by approximately one million persons. The imperative in Alberta is once again to allocate substantial resources for the purposes of sewage and water treatment plants, schools, hospitals and roads, etc. These priorities are clearly different than those in jurisdictions whose population growth is significantly less.

But there is good reason to hope these necessary reforms will succeed. For example, in education, one of the keys to further economic diversification and productivity growth, the province's results have been highly favourable when seen in a national context and, on several fronts, superlatives are again in order. The K-12 system in this province is not only the best funded in Canada, but is also arguably the best in North America and was recently cited as one of only four great education systems in the world. (5) Recent data for the first years of this decade indicate solid success in reducing high school dropout ratios in spite of the red-hot job market. This success comes on top of the increasingly stellar success of Alberta students in international PISA tests--a collaborative assessment effort involving all member countries of the Organisation for Economic Co-operation and Development--in math, science and reading literacy. Lifelong learning opportunities abound and government funding has been generous. (But with regard to early childhood development and programs for parents from onset of conception and for young children up to the age of five, much, much more can be done.)

In the post-secondary sector, the province's community colleges and institutes of technology are among the best funded in Canada, and their performance is very strong, thanks in large part to partnership agreements among themselves as well as with Alberta's universities and with industry. These are allowing them to be aggressive in their strategies for meeting the skill shortages in the Alberta economy. With respect to Alberta's four universities, government operating grants per student have been a major challenge; they have not yet recovered from the 21 percent budget cuts of the mid 1990s, although champions of higher education, inside government and out, remain hopeful. In stark contrast, on the research front, government funding has increased substantially, especially for research on energy, information and telecommunications technology, agriculture, forestry and nanoscience.

This brings me to a final question--is Alberta ready to take on the national role of creative leadership that its economic status is increasingly making possible? With Richard Florida's The Rise of the Creative Class on my mind and his focus on research-intensive universities, tolerant and talent-attracting communities, I would like to conclude my portrait of Alberta with some thoughts on its political character.

In interactions with citizens across all of Alberta, I have found a healthy respect and tolerance for widely disparate views and a predisposition of individuals to frequently ask why not in response to a new idea, view or proposal; after which, of course, debate ensues. The balance between personal responsibility and concern for one's fellow citizens strikes me as just about right among most Albertans I meet, and their "let's get on with it" attitude is highly admirable. There is no doubt that the political consensus in this province differs somewhat from the prevailing mainstream in most other parts of Canada--especially the traditional bastions of political power in Ontario and Quebec. Albertans have a long history of reform-minded populism and an instinctive preference for hard work and fiscal conservatism. It is also evident that a significant portion of the province's population--possibly a majority--are willing to envision market-driven policy proposals (a role for the private sector in health care, for example) that are far less popular in the rest of the country.

Regardless of what non-Albertans might think of Alberta's distinctive political culture, it would be hard for realistic observers to deny that these values are gradually having a greater effect on the national stage, and that it is Albertans who are playing a key role in ensuring that they do. In the coming decades, Alberta may indeed become more like the rest of the country, but my prediction is that this will be far less due to a transformation within Alberta, and far more the result of a shift of opinion in the nation as a whole. For better or worse, the rest of Canada is going to find itself increasingly influenced by Alberta's phenomenal wealth, its record of continual policy innovation and its long-established political values. Like many Albertans, I am looking forward to seeing the creativity that our province will increasingly unleash on the national stage.

Notes

(1) Neil Reynolds (2007), "Eureka! Coal-Fired Elation in Bells Corners," Globe and Mail, May 11, page B2.

(2) For background on the Alberta Heritage Trust Fund, I am indebted to Mark Lovewell, economist and co-publisher of the LRC.

(3) Peter J. Smith (1991), "The Politics of Plenty: Investing Natural Resource Revenues in Alberta and Alaska," Canadian Public Policy, June, page 150. For a thorough review of developments in Alberta in the 1980s as the last oil boom ended, see Robert L. Mansell and Michael B. Percy (1990), Strength in Adversity: A Study of the Alberta Economy (Edmonton, University of Alberta Press).

(4) Alberta (2007), "Alberta Economy" <www.alberta-canada. com/economy/economicResults/ fastestgrowingeconomy.cfm>.

(5) Sam Dillon (2007), "Imported from Britain: Ideas to Improve Schools," New York Times, August 15, page 6.

Roderick Fraser, OC, was president of the University of Alberta from 1995 to 2005, after 30 years at Queen's University. As president emeritus, he now serves on several boards of directors and is a recipient of the Japanese Order of the Rising Sun, Neck Ribbon with Gold Rays.