Sometime toward the end of November, the Alberta government will release their 2nd quarter fiscal update. Finance Minister Robin Campbell will likely tell us that the second quarter was another good quarter but that the good news is coming to an end and the 1st quarter projection of a $3 Billion bonus will be revised. The reason of course is that oil prices are down again. The budget projected $95 oil (WTI) and today’s spot price is under $79. For every drop of one dollar in the price of oil (WTI) the government treasury loses $215 million.
As much as Premier Jim Prentice wants to paint the government as being under new management, I’m not willing to buy until I see changes to how the government manages our oil and revenue situation. He has already stated that he does not plan on raising taxes, which means we will continue to rely heavily on volatile revenue sources.
“Alberta relies heavily on revenue sources that can be volatile and unpredictable, including non-renewable resources, corporate income tax and investment income. Since 2000-01, these revenue sources have accounted for anywhere between 38% and 55% of total revenue.”
– Alberta’s Fiscal Plan 2014-17
An Alberta government truly under new management, would propose a comprehensive new plan for managing our oil resources, rather than approaching it the same mediocre way we have been doing it for the past 10-15 years. Here are 9 key features that should be part of that plan:
1. Restrict resource revenue to capital expenses, savings, debt repayment or economic diversification
Some like to say that taking on debt amounts to stealing from our kids and grandkids. I would argue that the rapid development of our oil resources is a similar form of inter-generational theft. That oil belongs not just to us, but also to our kids, grandkids and all future generations of Albertans. As we sell of that long term asset we are obligated to spend it on things that have long term benefits, Here are four things that would qualify.
First, we can spend it on long term investments like roads, schools, hospitals and other capital infrastructure. Second, we can save it like Norway has done (more on this later) so that down the road the interest on the savings can be used by future generations. Third, we can reduce our debt, but this only makes sense if the interest on debt is lower than the interest that can be earned by saving the money. Finally, we owe it to future generations to invest some of the earnings on economic diversification; our oil reserves are finite and we must make sure that the economy remains vibrant after the oil is gone and we must start work on that now.
2. Remove resource revenue from operational spending
With over 20% of our operational revenue coming from non-renewable resources we are stealing from future generations to pay for programs now. This must stop. Peter Lougheed said that we need to behave like owners. It is irresponsible to sell off part of the farm just to pay for more fertilizer.
3. Raise corporate and personal income taxes on the wealthy
We will need to replace that revenue, but fortunately we have a great deal of room on the taxation side to accomplish that. The Alberta government proudly acknowledges that we could collect an additional $11 Billion in taxes and still be the lowest taxed province in the country. We need to collect just $9 Billion more to stop the intergenerational theft of using resource revenue to fund current programs. A mix of new taxes on personal income over six figures, on corporate income and a small consumption tax can balance the books without losing our competitive advantage.
4. Raise Royalties
Simply put, royalties are what Albertans are paid when we sell our oil or gas in the ground to the company that digs it out and sells it or processes it. In 2009, a comprehensive report comparing jurisdictions found that other places, including Norway, collected much more in royalties despite having higher production costs and a similar business climate to Alberta. Despite having lower production levels and less time to accumulate, Norway’s oil trust fund is nearing $1 Trillion while the Alberta Heritage trust fund is at about $17 Billion and hasn’t grown in decades. We are similarly selling out our kids when we sell off their oil at a big discount.
5. Start a crown corporation to extract and develop oil here and abroad.
To be fair, it is not just royalties that have contributed to Norway’s huge fund, it is also the existence of StatOil. StatOil is the world’s 11th largest oil company and is owned two-thirds by the people of Norway. Not only does StatOil account for 60% of Norway’s oil production, they are also active in 35 other countries includingCanada. In 2012, they generated over $11 Billion in profit. A crown corporation would bring strong revenue to the province and additional stability to the sector at home.
6. Invest in green energy and alternative sources
I mentioned earlier that some of our resource revenue should be used to invest in economic diversification. The best way for us to diversify our economy is to invest in alternate and green energy. Oil is finite, but the world will always need energy even after oil is gone. We are an energy super power now, we can be an energy super power in the future but we have to take some risks and use our current wealth to invest in research and development to become leaders in alternative energy sources.
7. Demonstrate a real commitment to the highest environmental standards
The death of 1600 ducks on an Alberta tailings pond in 2008 was a tipping point for how the world viewed Alberta’s environmental record when it came to oil. Rightfully or wrongfully Alberta gained an international reputation for bad environmental practice. We need to regain the social license for oilsands development and we must be leaders at environmental enforcement. To accomplish this we need an environmental regulator that is not just effective and stringent but is also seen to be effective and stringent. This means staying away from appointing energy lobbyists as chair of our environmental watchdog corporation.
8. Upgrade more bitumen in Alberta
The biggest benefit for general Albertans of having such a large store of oil here is the jobs that are created. But the bulk of job creation around the oilsands relates to the building and expansion of extraction projects. As the projects move from the construction phase into the production phase there are fewer jobs. It is in our interests to extract more value before the product is shipped out of the province. Also, processed product demands a higher price (albeit from more limited markets) than raw bitumen. We should get more value from our oil by upgrading more bitumen here than we currently do.
9. Get the products to the best markets in the safest way possible
Oilsands production levels are increasing faster than our capacity to get the product away from Alberta. This results in a glut of oil that stays here and, by the law of supply and demand, fetches a lower price. We should be supporting infrastructure investments that safely move the product to markets that generate higher revenue. If the safer method is pipeline then we should support pipeline development but we should also support research into technologies that will continue to make pipelines safer.
I think that as much as controversy over expenses, skypalaces and aircrafts sunk Alison Redford, so did the unnecessary cuts of Budget 2013. A common problem with the Klein, Stelmach and Redford administrations was a lack of a comprehensive long term financial plan – especially as it related to managing our oil resources. The 9 keys presented here are not just individual tips but are integrated with one another to create a coherent strategy. This plan may not be the one Premier Prentice wants to use, but an integrated and well articulated strategy is needed.