Trouble in Eden

Falling oil prices cause havoc in Canada’s fiscal promised land


Trouble in Eden

For years the Alberta government downplayed its surplus forecasts by lowballing the price of oil, permitting an end-of-year bunny-from-the-hat routine—surprise, oodles of cash!—that finance ministers relished. But last August, as oil enjoyed its precipitous summertime climb—it peaked in July at US$148 a barrel, with some anticipating a near future of $200 oil—Finance Minister Iris Evans decided she should play a little fairer. She revised an earlier reckoning (a tidy surplus of $1.5 billion, calculated on $78 oil) to $8.5 billion, based on a less conservative estimate of US$119.25 per barrel. Now, with oil hovering around US$50, Evans likely wishes she’d left the bunny deep inside her hat.

Last week, she had to revise her forecast again, pegging the surplus at just $2 billion, a $6.5-billion tumble in three months. Analysts don’t see oil rebounding soon. Few in Alberta’s government have ever experienced a two-year slump. “The last time that happened was in the early 1980s,” says analyst Martin King, of FirstEnergy Capital Corp.

The province has meanwhile committed to an orgy of spending—$37 billion in last April’s budget, up almost 10 per cent from the previous year. So spooked are Albertans that many want the province to delay the $2 billion it committed to carbon sequestration technology, the backbone of Premier Ed Stelmach’s campaign to clean up Alberta’s “dirty oil” image. The commodities slump also means Alberta won’t this year contribute to the Heritage Fund, a savings plan designed for when its dwindling conventional oil and gas reservoirs run dry. Worth just $15.8 billion today despite having been created in 1976, it’s already lost $1.2 billion in six months due to the global financial meltdown.

Alberta’s current spending habits, combined with waning energy revenues, will put the province into deficit in as little as five years, says a report prepared by a government-appointed commission led by University of Calgary economist Jack Mintz. Released last Wednesday, the report says the province must boost the Heritage Fund to $100 billion by 2030—otherwise it risks having to raise the average tax rate a crippling 40 per cent over the next 15 years to make up the difference in shrinking oil patch kitty. That Mintz submitted his findings back in January suggests how anxious the government has been to make them public.

Still, last week was as odd a time as any. Also on Wednesday, Stelmach boldly lowered the royalties Alberta was to charge oil and gas companies, a move aimed at stimulating economic growth now that drilling has declined. The premier had unveiled new, higher royalties just over a year ago when commodity prices were soaring. Now the framework has been tweaked again, reducing Alberta’s take from some new conventional wells for five years (oil sands and existing wells aren’t affected by the changes). Then, early this week, he fiddled again, moving up the date for the weakened levies from Jan. 1 to Nov. 19 because companies had been madly cancelling rig contracts to wait for the more attractive royalties.

Critics say all this makes Stelmach look erratic. Worse, because the higher royalty rates had never actually taken effect, the province never reaped the rewards of run-up oil. Has Alberta missed the oil tanker entirely, then, with prices off $100 from July? “It was $50 a year ago—come on, man, we were growing like crazy then!” says Regional Municipality of Wood Buffalo Coun. Mike Allen, of Fort McMurray. Allen, who runs a musical instrument shop catering to oil sands workers, had one of his best months ever last month, slump or not. Confused? So, very likely, is Stelmach. But steering Alberta through swelling, falling oil is like performing sleight of hand on the high seas. Sooner or later, the rabbit gets sick.

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Trouble in Eden

  1. Venezuela, Russia, Alberta, Iran . . . one-party states are hurtin’ the world over.

  2. Ah Stelmach.. ye of zippo sense, and proof that a warm stick of butter could get elected Premier in Alberta if it sported the conservative logo.

    So anybody who wants to argue that government subsidies don’t stimulate an economy? Please take a look at Alberta, where we’ve been applying subsidies to our oil industry for years, selling off our oil at fire-sale rates (lowest in the world) for decades. Now, after having a report for nearly a year saying that we need to massively boost our intake from the oil reserves we have left, Stelmach lowers the upcoming royalty increase to “stimulate” the oil industry and then wonders why producers stop drilling at the current higher rates. Hmm.

    And on top of that, rather than increasing the rate at which we feed into the Heritage Fund to avoid having to become the next Have-Not province, he’s decreasing it, evidently hoping that the magic oil fairy will come along sometime in the next few years and whisk his troubles off to the tailings pond, never to be seen again.

    Hey Stelmach, oil execs, unlike yourself, are not stupid. Everybody with a bit of sense knows that when you see a sale advertised for tomorrow, it’s kind of stupid to be buying today. Oh wait, you were stuck shopping at the SAAN store, weren’t you?

  3. In times of challenge, you learn much of the Government

    Stelmach has proved he is out of touch and out of time, He missed the window and now business is moving elsewhere while he and his fellow politicians trying to justify why they should keep 30% wage increases in place while we see freezes (at best) going on elsewhere.

    He needs to be honest with himself and his people. This is the wrong time for a Royalty framework and they need to lead by example, cut costs and divert money into incentivizing further development for the sake of jobs and easing a much greater supply crunch in the future. The economy also needs to diversify or it will miss another window – migration to alternate technologies and sources of energies.

    So far, he has only proved that at best he is far behind chasing events and poor at leading and being in front. There is a difference between panicking and being proactive.

  4. “So anybody who wants to argue that government subsidies don’t stimulate an economy? Please take a look at Alberta”

    Tax cuts (royalty reductions) are not subsidies and do not act on the economy the same way as new spending (stimulus). And Alberta has not been “selling off our oil at fire-sale rates for decades”. Such an interpretation relies on a complete misreading of the economics of oil and reminds me of the grossly misinformed rants of the Left during the royalty debate.

    That said, I believe the Alta. Tories have squandered their (our, as a recent emigre from Alta.) golden opportunity to build the Heritage fund, if that is what Albertans wanted, by acting as if high oil prices were here to stay and permanently jacking up the cost of gov’t to unsustainable amounts. I’m actually unconvinced of the desirability of such sovereign wealth funds, but the alternative should never have been to spend the surpluses like a crew of drunken sailors.

  5. I’m not an Albertan, but my two cents on the whole matter is that the oil royalties should have been treated as a windfall, and put into a sovereign wealth fund to enrich Albertans now and into the future. Thus, ordinary taxation would have to cover the costs of operating government. The way things are going, when the party is over, Alberta may or may not be in a particularly enviable position, and it will certainly be left with a devastating ecological nightmare spanning thousands of square kilometers. Hope it was worth it!

  6. The suggestion that oil royalties be saved as a windfall would have meant jacking up other taxes. What you need to do then is compare the future benefits of the royalties thus saved with the ongoing costs of much higher current taxes. I suspect you would find the benefits are not there, esp. as the ultimate value of such sovereign wealth funds is not nearly as clear as you apparently assume. One benefit of your proposal, however, is that the province would not have embarked on its massive spending spree of the past decade.

    Anyone who continues to believe that the legacy of the oilsands will be “a devastating ecological nightmare spanning thousands of square kilometers” is, oh, about a decade behind the times. I suggest you learn about the actual treatment of the areas being mined for bitumen. Water and, if you are a global warming alarmist, carbon emissions, are the main ecological issues, not devastation of the landscape.

  7. Tailing ponds? Heavy metal contamination of ground and and surface water? Then there is the whole sour gas issue, which isn’t tar sands specific.

    Brian: keeping taxation so low in Alberta has meant an astonishingly overheated economy and inflation. I think some revenue smoothing would be in order. Using royalties to fund provincial government spending is comparable to adding stimulus to the economy continuously, which not surprisingly isn’t always a great idea.

    A properly managed sovereign wealth fund could provide a large portion of Alberta’s operating budget revenues on an ongoing basis. Burning all that cash as it comes in leads to an overheated economy, and with oil and gas crowding out other industries, the lack of diversification leaves Alberta vulnerable to a downturn in energy prices, such as what we are presently experiencing.

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