Country divided - Oil woes churn east of Alberta

www.canoe.ca Sunday, February 16, 2003 By TODD NOGIER, BUSINESS EDITOR

 It's looking like a tale of two economies. Soaring oil and natural gas prices have begun to churn up concern in Central Canada about how consumers will get hit in the pocketbook. Gasoline prices are hovering near record highs and home heating bills are increasing. But that's only the beginning. A sustained high oil price could seriously curtail consumer and business spending, economists say. "Most consumers just basically have to swallow the increases," said Douglas Porter, senior economist with BMO Nesbitt Burns. "Effectively what happens is -- no doubt about it -- it hammers confidence and it does tend to crimp spending on other things, places where consumers can cut back, so discretionary spending does feel the pain in the short term," he said. But the opposite is true in Alberta, where oil and gas are the lifeblood of the economy. Rising oil and gas prices boost oilpatch activity and bolster the bottom line of the province's big energy companies. That trickles down to heightened job security of energy workers and rising salaries. Momentum in that sector boosts others such as retail, construction and professional. The result: As other regions of the country watch their economies falter, this one gets a shot in the arm. "I suspect the impact of high oil prices will be negative for Central Canada and positive for Alberta," said Craig Alexander, chief economist of the TD Bank. Oil prices have been steadily rising since last fall and closed at $36.80 US a barrel on Friday, its highest since September 2000. Porter said a one-third increase in energy prices, which is what's expected, would take about two percentage points from the level of consumer spending in Canada. But retail spending in Alberta is forecast to rise, contributing to a boost in GDP growth here to about 4% this year. Economic growth in Canada is forecast to hover under 3%. "Clearly, when you have one full percentage point difference in growth, there really is a dichotomy in how soaring energy prices affect the different regions within Canada," said Alexander. In fact, the dichotomy can even feed upon itself. During the last energy price spike two years ago, Alberta led the nation in growth, contributing a massive increase in the number of job seekers migrating to this province. EXPERTS SPLIT Demand for housing here skyrocketed and that growth put pressure on governments to heighten spending for roads and highways, as well as for schools and other services. Higher royalties gives the Alberta government the financial clout to hike spending to deal with the pressures. That adds to economic growth. The experts are split on whether oil and gas prices will remain as high as they are now. Alexander said if war breaks out in the Mideast, oil prices could jump to $40 or $50 US a barrel, then remain at those levels for a short time before plunging back down to $22. Natural gas, much more dependent on weather, is likely to begin its drop-off within weeks. Other analysts point to the possibility prices could stay high with a slow ramp-up in production from Venezuela after its strike. U.S. inventories are at their lowest levels since 1975. High prices could dampen Canada's economic growth by a bit less than half a percentage point, predicts Alexander. "I don't think we're in danger of slipping into recession, even if these prices stick around."