Alberta’s Addiction | By Dave Jones and Finbarr Timbers

CC Image courtesy of Cindy Kilpatrick on Flickr (August 16 2009)

IN 2010, ALBERTA’s,  NON-RENEWABLE RESOURCE REVENUE made up 19% of government revenue; in 2012, this has swollen to 28% of government revenue. This is clearly problematic: despite international signals that oil prices may continue to trend downward, the province is becoming increasingly reliant on non-renewable resource revenues to fulfill budgetary promises.  What is even more troubling is that Alberta is running a deficit – sizeable, at that, reaching almost 886 million dollars. Further, although Alison Redford’s government projects a return to surpluses in the next few years, this is entirely based off of increases in bitumen royalties. Given increasing global instability, both geopolitically and economically, this seems to be a  poor decision. Despite recent news that surging royalties and land lease sales may have all but erased the deficit for 2011-2012, the issue remains critically important. In fact, this spike in income speaks to the volatility of the market and the need to develop policy less reliant on royalties.

Oil royalties are intrinsically highly-variable, depending as they do on the market, and can change rapidly. Large individual actors can significantly alter the market, and it is estimated that up to 40% of the price of oil is determined by speculators. It is inherently bad policy for a government to rely so explicitly on market forces to fund its programs. Moreover, non-renewable resources are non-renewable; there will come a time when the production and sale of Alberta bitumen is no longer economically viable. If Alberta does not prepare for that day, we will become the Aesopian grasshopper, dependent upon Ontario, Saskatchewan and – god forbid – Quebec  for money.

As it currently stands, politics play far too great a role in determining fund allocation, year over year. To lay the framework for a more sustainable future, the province needs to divert a fixed percentage of royalty revenues into both the Heritage Trust Fund and the Sustainability Fund. Both these funds represent efficient investment vehicles for the government during prosperous times, and the latter can act to lessen deficits during downturns.The government appears to frequently attempt to placate numerous special interest groups advocating for funding, to the detriment of the general population. Removing the capacity of the government to squander mineral wealth in the interest of political gain will help ensure  greater growth in Alberta’s future.

One example of a strong choice for further investment would be using the program to invest more heavily in alternative energy research at the University of Alberta. Expanding research to include nuclear power, for example, will strengthen Alberta’s future as an international leader in energy and bolster Alberta’s international image. Another option would be subsidizing the expansion of engineering technology programs at NAIT. With the strength of the engineering industry in Alberta, NAIT could expand to provide world-class technical education, making Alberta a more attractive destination for young immigrants.

By using Alberta’s surpluses to invest directly in the future of Alberta industry, Alberta can avoid becoming a have-not province like Quebec after the collapse of the garment industry or Ontario after the collapse of the manufacturing industry. Innovation and diversification are integral to maintaining Alberta’s prosperity in the long run. With Alberta’s high concentration of engineering and heavy industry companies, we are well-poised to seize this opportunity and become an international leader in energy.

Finbarr Timbers is a third year math student who is deeply interested in developmental economics. When not in class, Finbarr is either running or trying to explain what, exactly, ring theory is to bemused arts students. Finbarr is currently reading Discourses on Livy, by Machiavelli.

Dave Jones is currently entering his third year of University, studying Accounting and Economics. When he isn’t meandering around HUB, he’s out enjoying Alberta’s great outdoors or taking in Edmonton’s cultural gems. He is currently reading Globalization and Its Discontents, by Joseph Stiglitz.

 

 

 

 

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  • amanda

    What a tool.

  • Kristen

    There is a good deal of false information in this article (or, facts are interpreted in misleading ways). At least one false claim per paragraph, on average. Also, 886 million dollars is not a very large deficit. And budget projections are made on the basis of all energy revenues, not just bitumen. Natural gas prices have fallen recently but are expected to pick up again. It’s also about expected fluctuations in output. And the value of the Canadian dollar makes a pretty substantial impact, too. Budgeting is complicated. There are more problems, particularly where you begin to make claims on political matters, most of which remain unsubstantiated assertions. Overall, it is clear that the author(s?) have only a narrow understanding of the topic. Sorry, guys. I agree with your general position but this needs work.

  • Dave Jones

    Respectfully, Kirsten, I would have to disagree with you. I don’t know if somewhere, at some point in time, 886 million for a provincial government became a small sum of money. Further, the provincial government’s exposure to fluctuations in bitumen price is completely dissimilar to their risk with natural gas.

    For every dollar decrease in oil prices, the government stands to lose $223 million in revenue, compared to $28 million for a $0.10 drop in natural gas. So yes, the assertion that bitumen royalties are a greater concern to the government appears to be true.

    Further, the exchange rate is beyond the control of the provincial government, and therefore, beyond the scope of our article.

    Finally, yes, obviously budgeting is complicated. That is why we should employ qualified people who are capable of making projections without political interest, which appears to be the case in the most recent budget

    Please enlighten me as to any further supposed misleading claims, I am interested.

    http://www.finance.alberta.ca/publications/budget/budget2012/fiscal-plan-economic-outlook.pdf Page 88 will substantiate my assertions in this response.