That Alberta is dependent on its resource sector is hardly news – the province has long relied on both the economic activity and the direct revenue from royalties and land sales to underpin government budgets.
However, to listen to many opining on Alberta’s finances and offering solutions to our fiscal “crisis,” you’d think that Alberta was more dependent on resources than it has ever been – and that’s not at all the case. Alberta’s government revenue story is best summed up by three words: growing; cyclical and diversification. For that story to continue, however, Alberta is going to have to do a lot more than pray for another oil boom to come along.
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First, the growth. If you look at the accompanying graph based on data provided by Alberta Energy, Alberta’s fortunes have grown not just via royalties and land sales, but via a broad and relatively smooth increase in government revenues – albeit with a significant acceleration in the past 15 years. Of course, much of this is energy-related if you take account of income taxes from energy sector workers and spinoff industries, corporate taxes from companies in the energy and energy services sector as well as (at least for a time) returns from the Heritage Fund.
Second, the cycles. Alberta’s economy is cyclical, and government revenues see sharper rises and falls than in other provinces, with the exception of Newfoundland and Labrador. But Alberta has also been remarkably robust to some large changes. After averaging nearly $6-billion a year from 2001 to 2008, natural gas royalties dropped to $1.5-billion in 2009, and have never recovered – they are now projected to be below $1-billion for this fiscal year. How many provinces could withstand an 85-per-cent decline in a revenue source that made up 16 per cent of total government receipts? Alberta did, between 2008 and 2009.
Next, the diversification. While oil sands have yet to deliver royalty payments as large as natural gas did, their increased importance to the economy was well-timed. While Alberta has not saved revenues from oil and gas production to the degree seen in Norway, it has invested significantly in education (I’m a little biased here), research, health care and infrastructure. Alberta also benefits from a variety of other industries, including a vibrant technology sector in Edmonton. None of these, nor a more sizable savings fund, will fully insulate Alberta from a long downturn in commodity prices.
The future may be different for Alberta. A province so dependent on energy is looking at a situation where new technology, both for oil and gas but also for renewables, has and continues to change energy markets. This, along with a global push to combat climate change that is bound to get stronger, may leave Alberta without a reliable source of revenue, employment and economic activity to replace the hole that will be left in the budget by $50 oil. The Canadian Association of Petroleum Producers announced on Wednesday a decrease in capital investment of 30 per cent, accompanied by a slow decline in conventional oil production. These changes, along with lower corporate profits, will ripple through tax rolls and the economy at large, and their effects will be felt for some time to come, even if oil recovers. Even before the steep decline in oil prices, costs were increasing and production was lagging the forecasts. Pipeline projects are stalled, and despite the protestations of project proponents, these costs and uncertainties matter, especially in a sector that has not been providing expected returns to investors. U.S. President Barack Obama has made no secret of the fact that climate change, and the global negotiations in Paris this year, are pivotal to his legacy. Alberta is not in good shape.
Many of these problems are fixable, but the province is going to have to work much harder this time around. Costs in the oil sands will only come down once the province takes an active role in managing the pace of development. Credible climate change policy and oil sands development are not incompatible, and Alberta needs to demonstrate this to the world. Pipelines are not going to get built just because we scream about jobs – they’ll get built when we can tell a compelling story about the role for oil sands in the kind of world that stakeholders along those routes want to live in. We can’t send Premier Jim Prentice to Paris to argue that Alberta deserves special treatment because it’s cold here – and we have oil – as temperatures rise. It’s just not going to work.
So, Alberta’s had a great run but, unless there’s another resource waiting to be discovered for which the world is willing to pay a premium, we’ve got work to do to keep it going. Hopefully we’re up for the challenge.
Andrew Leach is the Enbridge Professor of Energy Policy at the University of Alberta.