Alberta’s not-so-renewable revenue

Colby Cosh on spending Alberta’s oil cash

Todd Korol/Reuters

Alberta premier Alison Redford has put her government in national headlines with news that the province, at a time of high oil prices and outstanding labour-market conditions, is going to finish with an enormous deficit for 2012-13. The actual shortfall for the first half of the year came to $1.3 billion, and the 12-month total might be more than $4 billion. Redford blames what she calls the “bitumen bubble.” Alberta has sometimes gotten into fiscal trouble because of the unpredictability of benchmark prices for oil, but this time it is getting crushed by poor regional prices as the U.S. Midwest transforms from needy buyer to massive seller.

Economists and pundits inside and outside Alberta have used the opportunity to repeat long-standing pleas for the province to make its public revenue less oil-dependent. Since oil is a “non-renewable resource” that can only be sold once, goes the theory, the province’s share shouldn’t be used to meet ongoing government expenses; the worthy thing to do is to set it aside and invest it.

I find aspects of this argument amusing. In the early ’70s everyone agreed that Alberta’s “non-renewable” conventional oil would be gone in a decade or so. Yet the trend was for the amount remaining to keep getting larger. Meanwhile, how’s Newfoundland making out with its hypothetically “renewable” cod biz?

Every “resource” is a mixture of matter and human labour: if we are going to sequester oil royalties, that means sequestering not just the value of the sold hydrocarbons, but the added value of the effort by present-day Albertans to find, extract, and, when it comes to tar sands oil, change it into something deliverable to refineries. Syncrude Ltd. is called “Syncrude” for a reason: it sells a product synthesized from nature’s materials, in the same way—in principle—that a chair is.

Even Albertans have some trouble understanding this. You can only sell a barrel of oil one time, once it’s in the actual barrel. But given the presence of hydrocarbons in a place, it is inherently likely to go through cycle after cycle of new exploration and increased efficiency. In essence there aren’t “renewable” and “non-renewable” resources; only less renewable and more renewable ones.

The idea of sequestering oil revenues is, I think, a subtle combination of utilitarian appeal and moral suasion. The government shouldn’t “squander” current flows of oil money, we hear; it should “save” virtuously for the future. The implied premise, interestingly, is that current government spending is “squandering” rather than “investment.” If it cannot be proper to expend precious oil revenue on current government programs, surely the capture and use of worker and investor income is equally unjustifiable? Our working lives are the ultimate non-renewable resource, no?

If you read credit reports on Alberta, you find that the raters take an interesting view of the Alberta government’s supposed abuse of oil revenues: namely, that the province is positioned to withstand an economic shock like the “bitumen bubble” precisely because it already used oil money to eliminate debt. Like a household that had run up a credit-card balance, Alberta chose not to pour windfall oil revenue into some investment apparatus like the Heritage Fund. It paid down the credit card. In this sense Albertans and their AAA-rated government are already living in a future benefiting from sound past stewardship.

I find myself wishing that economists would set aside quarrels over oil-revenue policy and help out with the practical corollary of a large deficit: chopping government spending. Alberta governments have invested plenty of energy in windbag futurological reports on what to do with oil surpluses. None has yet done what Ontario did: recruit one guy (star economist Don Drummond) to autopsy the budget and publicly identify areas of excessive fat. Premier Redford has been elliptical about what specifically needs doing about spending in the face of her “bitumen bubble.” Putting a Drummond to work wouldn’t cost much; heck, maybe Drummond is available!

He wouldn’t necessarily find it easy. Alberta already survived a generation of remorseless program-slashing, and it seems likely that high current spending is mostly a product not of specific boondoggles, but of all-around bad habits concerning public sector employee compensation. There are probably exceptions: Alberta’s alphabet soup of agriculture supports, to take one example, seems like a good candidate for economizing. But the tendency of premiers to bribe interest groups at politically sensitive moments might be the biggest problem of all, and no one has shown any appetite for tackling it.

For more Colby Cosh, visit his blog at macleans.ca/colbycosh




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Alberta’s not-so-renewable revenue

  1. Albertan’s with some of the lowest personal levels of taxation should neither find their books in the red nor complain about needing to explore the idea of paying some taxes to keep themselves in the black. They have the means more so than many of the rest of the provinces to control their own destiny.

    • Not necessarily Taxes are low because property value is high. Doesn’t mean they pay less taxes overall.

      • We pay the lowest provincial personal income tax. We do not pay sales tax. I am not sure about your comment regarding property values. In Calgary, property taxes are based on property value. The higher the property value, the higher the taxes assessed against the property. Still, in comparison to some places like Saskatchewan, we pay relatively property taxes. In addition we are paying NO healthcare premiums.

        • According to a City of Edmonton study, a couple of years ago, Edmonton property taxes are about average or maybe just below. The average property tax for all single‐detached houses in Edmonton was $2,640 per year,and ranked twelfth of the nineteen cities in 2010. St. John’s had the lowest average tax at $1,838, while Toronto had the highest at $4,281. Albertans have little reason to complain about taxes except the unfairness of the flat tax which gives generous benefits to higher incomes. .

          • Why would Albertans complain about any of their taxes? Even if as you claim the flat tax gives benefits to higher incomes, no one is paying a sales tax. No one is paying health premiums. Who exactly would complain?

    • We could just add a sales tax (which we have never had). 5% would bring in 6 billion dollars.

  2. How did you get from “investment” to “sequestration”?

  3. Albertans are eating their seed corn…..spending their capital…..they forgot about rainy days.

    Rather than raising taxes to pay for what they want, they are living directly on the oil. 30% of their budget is based on oil.

    When the oil boom ends….and it may well have done so already….Albertans are once again going to be up that well-known creek without a paddle.

    They didn’t diversify in spite of years of warnings to do so.

    • Apparently if Alberta instituted a 5% sales tax, we could raise the 6 billion we need per year from that.

      • I haven’t looked at the figures, but that’s very likely…..however I can’t see Albertans doing that after talking about the ‘Alberta Advantage’ all this time.

        I was hoping the new premier would straighten things out…..but she’ll have her work cut out for her.

        • Oh I don’t know. I can see that happening before raising personal income tax.

          • Not much way she can straighten things out without raising taxes. Magic ain’t gonna do it.

      • I don’t mind paying a sales tax. I dont want my taxes going to an health bureaucratese who spend and abuse their expenses then then when the government fires them….. They give them hundreds of thousands of $$$ as a goodby.

        I don’t want a penny of my taxes going to them. Give it to the drs and front line workers and I would badly pay an increased tax

  4. Oh my God, one can only imagine what sort of a disaster this would be if they had followed the Norwegian model…

    • Ya, what a disaster it would be to have 700 billion dollars in the bank. Are you joking? Or just ignorant? If we had 700 BILLION dollars in the bank, like the “Norway disaster”. We could cover most of our 40 ish billion dollar budget off interest. We Albertans should all be very very upset about this. The PCs have squandered our oil wealth. And now that all there buddies are rich, they will once again take the six billion out of the working mans pocket. Voters in Alberta are an embarrassment to democracy. We keep voting for the conservative shaft job. Wake up.

      • I think it was sarcasm.

      • It was sarcasm… If that’s a disaster, gimme a slice.

    • It would be a different Alberta, a more sedate Alberta with less growth, but with a large nest egg, as a poster below said.

      It depends on what you want. After all, do you think that Alberta hasn’t grown by 700 billion dollars (or whatever)?

  5. In 2011, Alberta ranked sixth in per capita government spending according to a recent Canadian Taxpayers Federation study. The persistent obsession with cuts and autsterity must be replaced with an understanding of Alberta’s failed and dysfunctional tax system which has created the widest income disparities in the country and an unbelievable concentration of wealth in the hands of a few, not to mention the current crisis. But conservatives want us to believe the solution is cuts. To what end? Simply to preserve the considerable tax benefits of the wealthy few and of corporations. I’m not impressed by the arguments in favour of more cuts as what they are really promoting is the continuation of an unfair tax system. The evidence of the study are here: http://taxpayer.com/sites/default/files/Provincial%20Expenditures%20by%20Province%20and%20Year(Per%20capita),%201988-1989,2000,2001,%202011-2012.pdf

  6. Wow. John Locke called… he wants his archaic philosophy back.

  7. Alberta does not have a revenue problem. Alberta has a spending problem.

    • Where would you cut Billy Bob? And by how much?

      Please be specific.

      • CARBON CAPTURE AND STORAGE

        Cancel – Shell’s Quest project $745 million

        Cancel – Enhance Energy and Northwest Upgrading’s Alberta Carbon Trunk Line $495 million

        Cancel – The Swan Hills Synfuels project $285 million

        PUBLIC SECTOR WAGES AND BENEFITS

        Pay freeze for 5 years minimum.

        That’s just a start, there’s so much more, including the bloated administration and management of all government departments.

        • I agree with the CCS funding criticism. Government shouldn’t be involved in funding that. But even if that money could be recouped, I believe that would be a one time event.

          A 5 year (minimum) wage freeze is unrealistic, unless the cost of living in Alberta, falls dramatically.

          Public sector pensions is an area that needs to be addressed, but that is an issue all across Canada. Public sector pensions should be transitioned to defined contribution plans or at least a hybrid plan. The taxpayer shouldn’t have to bear all the risk of defined benefit plans.

          As for bloated administration and management, I think that is just a hackneyed phrase that is thrown around, without any real evidence to support it.

          Alberta is fast growing, high cost jurisdiction, with low taxes. That doesn’t work. The province needs to move away from the “boom & bust” mentality and abandon pro-cyclical policies. When times are good, raise taxes, generate more revenue and store some away.

          The oilsands need to be developed in an orderly way. Limiting the number of concurrent large projects, in order to keep cost inflation and population growth under control. There is no point in growing the economy so fast, that you can’t afford to pay for services and infrastructure.

          • Did you know that in 2010 there was one manager for every 5.4 people employed directly by the Alberta government?

            Throughout the private and public sectors in other North American
            jurisdictions a more normal ratio would be about one manager for every
            10 employees. Oft-quoted management guru Tom Peters suggests that an ideal ratio is about one to 25.

            But here in Alberta, in addition to that group of approximately
            19,500 unionized civil servants directly employed by Alberta’s
            provincial government in 2010, there were 4,437 direct government
            employees officially designated non-union “managers” in the middle of
            that year. The resulting management-to-employee ratio was thus about one
            manager for every 5.4 civil servants!

          • Do you have any third party reliable sources to support those positions?

            I don’t know how you can quote an “ideal ratio”?

            Wouldn’t that depend on the nature of the work being performed?

            If the Alberta ratio that you quoted is indeed accurate, how does the current ratio compare to the past? Better, worse or about the same?

            How does it compare to other provinces?

            You need to be careful with averages, sometimes the underlying data can skew an average, giving a false impression.

          • Spoken like an overpaid under worked administration type.

          • Ad hominem attack?

            I am a little disappointed. I was at least hoping for a quote from an Ayn Rand story book.

  8. When is the media going to call out the private sector Calgary oil and gas (mostly) men who keep on screwing up?

    1) They were caught with their pants down on the US shale natural gas boom.

    2) They were caught with their pants down on the US shale light oil boom.

    3) They were caught with their pants down without sufficient pipeline capacity.

    They are supposed to be the experts on this stuff. Why do they keep on screwing up? Filthy rich morons.

    The thing about oil and gas is that there will be another boom, and the oilman’s prayer (“Please ‘diety-of-choice’ give me one more boom, and I promise next time I won’t screw up”)

  9. Maybe Alberta is proof positive that a generous welfare state is unaffordable even with the amounts of cash that the oil patch generates.

    • So there’s this country called Norway…

      • Doh!

  10. Why do leftists always mention Norway as the model to follow? It’s apples to oranges. You want the Norway way? Look to Saskatchewan running Saskoil starting in 1973.
    It’s only now that Brad Wall’s Saskatchewan Party kicked the NDP to the curb that Saskatchewan’s oil industry is actually functioning properly.

    • They mention it because it is sustainable and effective. It is a world class country by many standards, with a very high standard of living, largely due to O&G development.

      At the very least it is proof of concept. It is a working model, proof of how things can be done. Would it be easy to replicate? Probably not.

      It does shatter the right wing myth that an economy can never be successful with high levels of royalties, taxation and social spending.

      Specifically, what has Brad Wall done (or not done), that has allowed the oil industry to function properly?

      • It also depends on what you want. Do you want to use the money to develop your economy, or do largely want the economy you have now, buttressed by a big nest egg.

        Norway and Alberta just invested their economy differently. If Alberta wanted to be the same province it was in 1960 (cattle ranchers and not much else), but with a huge nest-egg to pay for a whole lot of government services, then it should have went the way of Norway.

        Alberta had dreams to be bigger than it was, so it spent the money and left the money in the economy accordingly. And yes, it has paid off. There are now many more people and industries in Alberta that were never there before. Norway on the other hand…

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