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Wednesday, November 26, 2008

Newfoundland and Labrador's Economic Roller Coaster

What a difference a month can make.

Earlier this month Newfoundland and Labrador premier, Danny Williams, announced to the entire Country that “have” status was a reality in his province, even going so far as to plan a celebration of the fact in March of 2009.

Now, long before the party begins it could already be over and the tide may have turned in the other direction.

Because of the turnaround cycle for calculating which provinces will or will not receive equalization, Newfoundland and Labrador will likely remain a “have” province, at least on paper, this year and next, but that label could be worth about as much as a beach front lot in New Orleans if the current trends continue.

Don’t get your party hats and noise makers ready just yet folks there’s a storm on the horizon.

The coffers of the Newfoundland and Labrador government will not be as flush with cash next year as the Williams government had hoped when the premier announced the province’s new status.

The reasons are varied, but one of the biggest has to do with the diversity of the Newfoundland and Labrador economy, or should I say the lack of diversity.

In the past decade or so the province has become more and more reliant on a flood of petro-dollars, petro-dollars that now account for about a third of all provincial revenues.

Since Williams’ “have” status announcement world oil prices, which reached nearly $150.00 a barrel earlier this year, have plummeted to the $50.00 mark, shedding nearly two thirds of their value and putting a major dent in provincial revenues.

As if this wasn’t bad enough, adding to problem for Newfoundland and Labrador is the announcement this week that production on the Hibernia, White Rose and Terra Nova oil fields will be shut down for several weeks in 2009 to accommodate maintenance and upgrade efforts.

During the summer of 2009 production at the 130,000 barrel per day Terra Nova and 110,000 per day White Rose fields will be shut down for a period of 35 days each.

The Hibernia field, which produces in the area of 150,000 barrels per day, will shut down for 21 days.

The combined impact of these closures will see a reduction in annual production of approximately 12 million barrels of oil and a serious drop in the provincial royalty revenues to go right along with it.

Nations around the world are entering a recession the likes of which has not been seen in many years, if it’s ever been seen before (the jury is still out on the severity of the situation).

One thing is certain, the current downturn has resulted in a dwindling demand for all natural resources, not just oil but also iron ore, nickel and forest products as well. This has led to a much lower value for those commodities and another drop in potential provincial revenues.

Adding to these concerns are reports that yet another component of the Newfoundland and Labrador economy is shedding value.

For years millions of dollars have been flowing into the Newfoundland and Labrador economy in the form of Fort Mac pay cheques but that revenue stream is taking a hit as well.

Many residents who have been forced to leave their homes to work out west have retained their residences here and continued to pay taxes and spend much of their income in the province, boosting the retail sector and housing markets.

Now, with the price of oil declining, even the once invincible Fort Mac is beginning to stagger a little. New projects and expansions have been put on hold and layoffs out west are being reported more and more each day.

With a provincial unemployment rate already well over 13%, this most recent economic “perfect storm” to hit our shores has left the outlook for Canada’s newest “have” province a lot less bright today than it was just a month ago.

It’s been said before, and it may be easier said than done, but I sincerely hope this bump in the road (perhaps the understatement of the year) finally makes federal, provincial and municipal governments, along with the private sector, understand that we need to diversify our economy.

Those petro-dollars and other resource revenues the province has been enjoying for so long can be as much of a curse as they are a blessing and they truly won’t last forever.

The terms “have” and “have not” are best left to accountants. When it comes to the impending reality of even higher unemployment, lost homes and lineups at food banks those words mean absolutely nothing.

Regardless of whether the global economic meltdown turns out to be a prolonged and painful one or merely a blip on the radar, what matters most is the ability of the people living here to find a job and put food on the table.

It’s only by diversifying the economy and becoming less and less dependent on the volatile pricing of natural resources, be it oil, minerals, timber or even fish, that Newfoundland and Labrador can ever hope to become a true “have” province in every sense of the word.

It’s not that difficult to understand when you really think about it. Even as children most of us heard the old adage “you don’t put all your eggs in one basket”.

I only hope that today’s political and business leaders finally see the wisdom in those words.

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