Robin Campbell has only been Alberta’s minister of finance for two months and already he has joined a venerable club stretching back to the earliest days of the province’s Progressive Conservative dynasty.
Presenting his first financial update for new Premier Jim Prentice on Wednesday, Mr. Campbell solemnly declared. “We have to get off the oil train.”
“We have to get to a position where we’re not listening to OPEC to decide on how many schools we’re going to build,” he said. “We need to get to the point where we have a budget that is not based on the price of oil.”
Congratulations to Mr. Campbell. He now agrees with every other finance minister, and probably most of the premiers, since Peter Lougheed delivered the province to Tory rule 43 years ago. I’m willing to go out on a limb and suggest that – just like all those others – he won’t manage it. Alberta won’t get off the oil train, because oil is where its money comes from. You might as well suggest Saudi Arabia shift its economy to hydro-electric production. Alberta’s prosperity has been built on the resources it digs from the ground, and it doesn’t know any other way to maintain the pleasant, prosperous life oil has provided. If it did, one of those previous finance ministers would likely have done something about it.
Despite the long odds, Mr. Campbell revealed that he has been directed by Mr. Prentice to free the economy from the peaks and valleys of the boom-or-bust resource sector.
“My focus right now is on looking at efficiencies and controlling costs within government,” he said. “We will not be running our operating budget in the red, but if oil is at $75 next year we will have to make some tough choices.”
The last premier who made “tough choices”, as opposed to talking about it, was Ralph Klein, who paid off $23 billion in borrowings and left the province debt-free. That was in 2004.
The last time that U.S. oil drillers got caught up in a price war orchestrated by Saudi Arabia, it ended badly for the Americans.
In 1986, the Saudis opened the spigot and sparked a four-month, 67% plunge that left oil just above $10 a barrel. The U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market.
Mr. Klein was succeeded by PC leaders who weren’t as hard-headed as he in resisting the pressure to buy popularity by spending the oil revenue as it gushed in. Albertans like a balanced budget and low taxes, but they also like hospitals, schools, new roads and high salaries. Alison Redford, Mr. Prentice’s most recent predecessor, promised them all those things and more, and when she couldn’t pay for it she blamed the “bitumen bubble” – the gap between the benchmark price for North American oil versus the lower price Alberta received. Even after her finance minister applied some fancy accounting tricks, the province was still looking at a deficit of $3 billion.
Mr. Campbell says that won’t happen on his watch. Thanks to oil, Alberta ended five years of deficits this year. “We’re committed to be fiscally prudent,” Mr. Campbell said. “Whether the prices go up or down, this government will remain steady on course.”
That’s easier said than done. The $23 billion debt Mr. Klein inherited resulted from a decade of low oil prices. Those governments had to make “tough choices” as well, but not tough enough to live within their means. As with Alberta today, they would have welcomed an alternative source of income, but couldn’t find it. Instead they borrowed. The present fall in prices has only just begun, and there is no telling how long it will last. A quick rebound will allow Mr. Campbell and Mr. Prentice to make up for any belt-tightening in the interim. A longer drought will be more problematic. (Fortunately for the Tories, their main opposition is in the process of self-destructing.)
Either way, the money will come from the oilpatch. There’s no use kidding themselves on that front. Alberta has been here before, lots of times.