Dr. Wade Locke`s Presentation (17 April 2013)

Resources and Newfoundland
and Labrador’s Future
A Presentation to Grenfell Campus’s Office of Alumni
Affairs and Navigate Entrepreneurship Centre
By Wade Locke
Department of Economics, MUN
Room AS 2026
Grenfell Campus
Corner Brook, NL
March 2, 2013
Introduction (1)
• I want to thank Grenfell Campus’s Office of
Alumni Affairs and Navigate Entrepreneurship
Centre for inviting me to speak to you this
• I would like to give you some sense of what I
see happening in the economy and the role
played by natural resources
Introduction (2)
• Newfoundland and Labrador has always been a resource
dependent economy
• Originally, NL was seen as a convenient fishing base where
settlement was discouraged and restricted initially
• NL was a resource dependent economy, primarily fishing,
then forestry, pulp and paper (GF 1909 and CB 1925),
mining (Bell Island 1895 and IOC 1962) and oil (Hibernia
discovered in 1979 and produced in 1997) represented an
increasing share of NL economy
• The cod moratorium (1992) made a depressing situation
• However, the future is bright, but there are challenges from
a fiscal and labour perspective
Demographics and the Economy
NL Population
Population fell from high of 580,109 (1992) to 506,330 (2007) – a fall of 73,770 (12.7%)
Population is starting to increase slightly. Between 2006 and 2012, population has
increased by 7,225 people (from 506,330 in 2007 Q3 to 513,555 in 2012 Q4)
If the resource projects, that are expected for the province, proceed, we are likely to see
a significant increase in population; otherwise they cannot proceed because we do not
have enough workers and we have an aging labour force
Aging Population
The population is getting older and the fastest growing group is those people that are
closer to retirement - age 45 to 64 years.
The age distribution is not projected to get better
An aging population will have implications for workforce and implications for housing
market (types and value of houses needed)
We Are Getting Older
Since 1999, NL older population than country as a whole
In 2012, NL 44.2 years old and CDN 40.0 years old
An aging population will reduce the supply of labour because people eventually retire,
reduce hours of work or die.
Higher wages will delay retirement for some and will attract others into labour force.
Unfortunately, attracted workers may not be perfect substitutes in terms of
productivity – not the same quality in terms of transferrable skills, experience,
motivation and ability.
Aging Population & Potential Workforce
Potential retirees started to exceed new entrants into the labour force for NL by 2006
Currently, potential retirees exceed the new entrants into the workforce by 34%
NL GDP and Personal Income Per
Capita Relative to Canada
After 1997, our fortunes started to change, but the real transformation started
after 2005. Currently (2011) GDP per capita Canada-wide is $51,109, while
GDP in NL in 2011 was $65,557
Unemployment Rate Canada and NL
Improving throughout Canada and NL. Since 2000 when NL rate was 244% of CDN rate, it
has improved to 174% of CDN rate in 2012.
Steady improvement since 1993 (20.1%) to 2012 (12.5%)
Employment Growth Since 1976
Overall employment has grown by 45% since 1976, about half of this growth
has occurred since 1997
While the goods sector is basically the same size, the oil and gas/mining
employment has replaced the fall in employment from the fisheries/pulp and
paper industries
The service sector has grown by 67%
Employment Growth Since 1976
Employment in the health sector has more than doubled (212%), education
has grown by 34% and public administration has increased by 90%, since
Public Administration has increased throughout the 1980s, declined slightly
before increasing since 2004, growing by 21% since then
Average Weekly Wages NL as % of CDN
Average weekly wage now above the Canadian average since 2011-09
This has been increasing steadily since 2004
Average Hourly Wages by Sector in NL
as % of CDN (2008/01 and 2013/01)
NL wages in all industries improving relative to Canada in both skilled and
unskilled areas. Surprisingly, retail sales represents one of the largest
increase relative to Canada
Median Employment Income of Tax Filers: NL as
a Percent of Canada and Relative to 2000
NL as Per Cent of CDN
Growth Since 2000
Something is already happening in NL, certainly since 2006. Median employment
income has grown relative to the national average (from 73% to 88%) and since 2000,
employment income has grown by 62% in NL and 35% nation-wide
Business Confidence
Small businesses in Newfoundland and Labrador are very confident about the
Consumer and Business Bankruptcy
– St. John’s
Clear decline in business bankruptcies and no significant change
in consumer bankruptcies in St. John’s
Housing Market
Assessed Values (excluding St. John’s)
Since 2006, assessed value have had a substantial increase in NL (excluding SJ).
Recent figures released by the MMA, indicate that average residential assessment has
increased by 42% from 2010 to 2013, by 130% from 2006 to 2013 and by 65% from 2006
to 2011
This is reflective of what is happening with prices.
Not spread evenly across the province and is reflective of economic activity
Housing Starts and Residential Building Permits
Residential building permits have increased dramatically, especially since 2006 (156%
increase – 2012 (to July) averaged $70 M and $27 M in 2006 (whole year)
Housing starts have picked up after 2000, but this may tend to moderate in the medium
New Housing Price Index
New housing prices have increased by approximately 50% since 2007
Appears to have stabilized in the last year
Housing Prices
Since 2006, when the impact of oil started to have a significant impact on the provincial
economy, NL housing prices have grown significantly – in both absolute terms and
relative to the rest of Canada
NL prices increased from $139,542 in 2006 to $268,776 in 2012 (93% higher than 2006)
and the forecast for 2013 is $278,500 (100% higher than 2006)
From 2005 to 2012, CDN prices increased by 31%
Newfoundland and Labrador Housing Market
Prices, houses for sales and sales have increased dramatically since 2007
Prices are still strong, but sales seem to be returning to longer term trend
Newly completed and unabsorbed houses appear to be reaching some kind of steady
state, but have declined dramatically over the years, with a secondary peak in 2006
Expect prices to continue to increase, but at a moderate rate and sales are expected
to remain at around 4,500 in the short term
Fiscal Reality
Government Expenditures – A Comparison
NL expenditure 50% higher than CDN Ave, 43% higher than Maritime
Provinces ad 17% higher than SK (the next highest province)
Health Expenditure – A Comparison
Health Expenditure in NL is above the CDN Ave and this divergence
has become larger over time
Per Capita Expenditure on Health Care
– NL (2010)
Source: CIHI data
An aging population will put more pressure on health care costs within the province
If no other cost drivers change (doctor’s salaries, cost of band aids, etc.), then in 20 years
the median age (44 yrs) person’s health cost will double and double yet again in another
10 years
Oil Prices
While government assumed oil prices in the order of $124/bbl at budget time,
prices have averaged $109.87 since April and $111.54 since August
Prices becoming more variable over time
The forecast was optimistic and will, according to Budget 2013, will result in a
deficit that is $430 million, not $250 million expected at Budget 2012
Oil Price Forecasts – Brent Crude
Oil price forecast used in the sustainability plan are in the middle of available public
forecasts and are certainly lower than those predicted by the 40 top forecasters
surveyed by Bloomberg ( Lloyds TSB Bank PLC, TD Bank, Citigroup, Barclays, CIBC, RBC ,
Deutsche Bank, Credit Suisse, Goldman Sacks, Bank of America Merrill Lynch, eg)
There should be no problem meeting $105 per barrel for the next three years
Government Deficits
There have been budget surpluses in six of last eight years. This is the first time
in our history, but, according to information released with the budget, we are
expecting two more years of deficit before returning to surplus
From 1949 to 1993, there were cash surpluses in only two years.
The cumulative surpluses in the last 10 years, according to the recent AG
report, were $3.5 B, while Accord payments over the same period was $5.0 B
Debt Servicing As a Percent of Revenue
Things have improved – there used to be $1 in every $4 required
to service the debt, but not $1 in $9
Without measures introduced in the sustainability plan, we are in
danger of going back to an ever increasing share of revenues
needed to cover debt servicing
Net Debt Government of NL
Net debt has come down in recent years, but with lower oil prices, deficits will be
higher than forecast and net debt will start to rise unless fiscal measures are
With maturing oil fields, we should expect a downward trend in government
revenues and if expenditures are not brought back into line, then deficits and
debts will continue to increase.
The need to control deficits and debt in the longer term will have implication for
public sector compensation and employment and the local housing market 32
Net Debt Per Capita – A Comparison
Our net debt per capita has been coming down, but is danger of
increasing significantly without the sustainability plan
Natural Resource Contribution
Resource Sector Employment
Resource Sector Employment
Non-renewable resources (mining and oil) employed 10,200 people, in 2012
while renewable resources (fish, forestry, paper) employed 10,500
In 1987, this employment was 30,000 for renewable resources and 3,500 for
non-renewable resources
While it appears that the cod are recovering, it will be a different kind of
industry than in the past – more capital intensive, longer employment per year,
and a smaller processing sector than existed in the past
Annual Production for Existing and Planned
Offshore Oil Fields
• To the end of 2011, 1,288 barrel produced and another 1,483 remain to be
Source: CNLOPB Reserve Estimates and forecasts
• Production from existing fields expected to fall off.
• Needs to be updated for additional production from Terra Nova (90 mm bbls)37
Economic Impacts Associated
with Development
The Hebron development and the White Rose Well Head
Platform will occur more or less at the same time and in the
same area.
This will create a significant demand for labour and will impact
the housing market through increasing demand for higher end
The White Rose development will yield significantly more
production, more employment, more business activity and
billions in additional royalties
Iron Ore Prices
Iron prices started to increase significantly after 2010, rising to US$187/DMT in February
2011 – representing 670% of 2005 prices (US$28/DMT)
In Sept price fell to less than US$100/DMT, but have recovered to US$150/DMT in January
and currently around $140/DMT
We are expecting a fall in prices towards the second half of the year as new capacity comes
on stream
While the short term will be characterized by price pressures, over time, the market will
enable the iron ore projects in NL to proceed
Iron Ore Employment – Various Scenarios
We are looking at more than a threefold increase in employment if the iron ore
projects under active consideration proceed as expected.
If labour and power do not constrain these developments, then we can see a
doubling of employment in the iron mining sector for NL
Iron Ore Tax Revenue – Various Scenarios
The potential exists to help out with the provincial government’s fiscal
position by supplementing government revenue by $700 million per year
Nickel Prices
Nickel prices peaked in 2007 just after Voisey’s Bay started (about $23/lb, currently
between $7.80/lb).
Prices are still above historic levels
HMP plant at long Harbour expected to commence in 2013/14 (direct, indirect and
induced employment could be in the order of 1,000 people during operations)
Voisey’s Bay will go underground. This will have a big employment impact (400450 direct jobs and total employment impact could approach 1,000 people)
Muskrat Falls
This will save consumers $2.4 B in present value terms over the next best alternative
It will generate $1.9 B in incomes to Newfoundland and Labradorians, $500 M of
which will occur in Labrador
It will average 1,500 full-time equivalent jobs each year during construction, peaking
at 3,100 jobs in 2015
This will be 9,100 direct person-years of employment over the project and 23,300
direct, indirect and induced employment
The government will receive $290 M in taxes associated with the construction activity
It will facilitate industrial development in Labrador
Other Energy Resources
• 11 Tcf of gas discovered (equivalent to in excess of 3 Sable natural
gas developments) and could have as much as 60 Tcf of gas
• 2041 Upper Churchill contract ends (5,400 MW of power becomes
available) and NL will get 2/3 of higher revenue but it won’t be
available for free to NL
• More than 5,000 MW of wind energy can be developed within the
province (currently between 50 and 100 MW are being generated)
• There are other oil fields to be developed and there could be as
much as 6 B barrels of oil (half of which is already discovered)
• There is west coast oil and gas potential, but that will be seen after
the rests of testing
LNG Prices
Source: www.realclearenergy.org
If LNG prices exceed $10/MMBTU in the UK, then it may be
possible to develop the natural gas resources off our shore
This could be within the next 10 years
We will remain a resource dependent economy with other oil fields coming on
stream within the next 10 to 20 years and within 10 to 15 years natural gas
should be feasible to produce as an export option to Europe.
The Lower Churchill (Muskrat Falls and Gull Island), Hebron, Voisey’s Bay HMP
and underground, White Rose GBS, Alderon, IOC and Labmag and future
offshore projects (eg., Mizzen) will create huge demands for labour and add to
the demand for housing
The Labrador Iron ore trough has the potential to be one of the most exciting
areas for develop in world.
– These development could represent 10% of provincial employment and this
could partially offset offshore revenue lost from reduced offshore activity by
adding $1 B to government revenues annually
The Lower Churchill and the development of renewable resources offers the
potential to continue the transformation of the newfoundland economy from an
economy dependent on non-renewable resources to one that is more dependent
on renewable resources.

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