Alberta's Strange Sinking Sensation
Why can't Canada's wealthiest province break even? Blame the paradox of plenty.
Alison Redford, the premier of Canada's wealthiest province, has encountered a $6 billion "bitumen bubble" on the busy Highway to Hell.
To most Canadians this curious disclosure seems confounding, if not paradoxical. How can "the economic engine" of Canada run five government deficits in a row yet promise prosperity for the nation? Is no one in charge?
Yet Redford isn't the only befuddled leader of an oil-fueled government. Thanks to the volatile nature of the world's most lucrative commodity, various petro states find themselves short of cash. And that's because most petro states don't know how to budget let alone govern.
Like any plantation economy, petro states operate pretty much like irrational monocultures: they know how pump oil, sell oil, talk oil and spend oil. But they don't know how to save or diversify its slippery wealth.
And whenever the price of oil plunges from $140 to $30 as it did in 2008, the fragility of petro states, regardless of their extreme political stripes, becomes as visible as a fat man in an overheated sauna.
Venezuela, home to the world's second largest oil reserves, just devalued its currency and it is as much awash in socialist debt as Alberta is in Tory deficits.
Texas, the father of all short-sighted petro states, has a tax system so calcified that it can't cope with a sudden drop in oil prices either. In Nigeria budget failure has become, well, a national pastime.
Louisiana, a polluted playground for BP, offers its citizens 440 different tax breaks as well as a steady diet of bust and boom budgets.
And yes, the former Soviet Union had a slight problem with oil price volatility and depletion back in the 1980s. In fact an unexpected fall in prices precipitated the collapse of a "stable" global superpower.
But recording deficits (and blatant inequalities) amid mountains of oil wealth makes every petro state, well, a paradox of plenty.
Oil's volatile revenues sculpt governments into masters of dysfunction; purveyors of fiscal neglect; practitioners of lazy statecraft; betrayers of democracy; traders in conflict, and ultimately, fully compliant to Big Oil.
But Redford, who can't spell the phrase Dutch Disease, avoided these uncomfortable realities in her little speech about the sad bitumen bubble.
According to Redford, the price of bitumen has taken an unexpected turn for the worse and the province now has a spending problem equal to the size of its education budget.
She then invited citizens to take part in a conversation about what to cut. Alberta Finance has even posted a digital budget for citizens to play with on the Internet.
But the invitation to converse is disingenuous. Petro states, which are studies in the abuse of power, engineer monologues for their citizens, not dialogues.
Moreover, Redford has already identified the politically correct solution. Oddly, it is not higher royalties, better governance, fiscal accountability, responsible taxation or even the novel upgrading of bitumen into more valuable products.
No, the only solution to Alberta's money woes appears to be the construction of more pipelines that might, cross your fingers, find higher prices for dirty bitumen in Communist, Saudi or Koch-owned refineries.
In so doing Redford illustrated what political scientist Terry Lynn Karl calls the crux of the oil resource curse: "It is a lot easier and faster to build a pipeline than an efficient and representative state."
Truth in short supply
Now here's what Redford forgot to tell her dear petroleum stakeholders, er, citizens.
First and foremost, Alberta has an integrity problem.
Alberta's string of deficits have nothing to do with lack of bitumen pipelines, but everything to do with the shale gas revolution which has dropped the price of natural gas to record lows.
Prior to the shale gale, natural gas earned more than $5-billion in annual royalties for the government: today the cash cow pours little milk ($1 billion) for Alberta's one party state. Yet Redford never mentioned "the shale bubble."
But there's another important omission. The gap between bitumen pricing and West Texas Intermediate is not new. Bitumen is a junk crude and signature of peak oil that requires costly upgrading and complex refining. The heavy gunk won't even move through a pipeline unless diluted with costly condensate.
As a result, a 2007 Bitumen Price Review warned Alberta's government about dramatic price drops in bitumen markets. "Essentially there is a lack of adequate market access due to increasing production levels." By failing to upgrade and refine bitumen into higher value goods such as gasoline the government would absorb "a high share of price risk" that goes with pouring raw bitumen into the marketplace.
But Alberta's petro state and its petro media ignored the report as well as the idea of adding value at home. So the growing price disparity is really a function of dedicated overproduction as well as a lack of smart planning. (Premier Ralph Klein didn't believe in such things and preferred to run government on "auto pilot.")
Between 1998 and 2008 Alberta regulators rubber stamped more than 100 tar sands projects raising bitumen production from 600,000 barrels a day to nearly two million. This policy predictably flooded the U.S. Midwest market with raw bitumen and drove down prices.
At the same time Alberta's Tories neglected to pay attention to declining oil consumption in the United States due to the 2008 oil shock and financial crisis. Having already been smacked by the effects of hydraulic fracturing on shale gas prices (it killed them), the government let itself get smacked again by a temporary tight oil glut in the Bakken and Eagle Ford.
In short, incompetence and laziness helped Alberta Tories create their very own bitumen bubble.
Follow the tax money
In addition to honesty gaps the size of tar sands mining pits, Alberta, like many petro states, has a dismal tax problem. The province's one party state draws, on average, 30 percent of its revenue from oil and gas projects. For more than 40 years Alberta's Tories have ruinously used these same petro dollars to distort, undermine and degrade a proper taxation system as well as enrich its cronies.
This explains why Alberta Treasury can still advertise Alberta as a fantasy honey pot with "low personal and corporate income taxes, the lowest fuel taxes among provinces, no capital tax, no payroll tax, no health premiums, and no sales tax" while the province chocks up one deficit after another and Redford cries bitumen bubble tears.
U.S. political scientist Michael Ross attributes such behavior to the pernicious "taxation effect" of oil: "When government derive sufficient revenues from the sale of oil, they are likely to tax their populations less heavily or not at all, and the public in turn will be less likely to demand accountability from -- and representation in -- their government."
Terry Lynn Karl, the acclaimed author of Paradox of Plenty, describes the petromania resource curse more directly: Easy access to oil wealth lowers "financial discipline within bureaucracies and leads to reckless budgetary practices. Most importantly, it preempts efforts to mobilize domestic resources through taxation" which, in turn, creates more dependence on oil.
And this explains why Redford (and the Harper government) now turn to Chinese national oil companies to solve the province's self-inflicted woes instead of difficult statecraft, the upgrading of bitumen or an overhaul of Alberta's out of whack tax regime.
Adam Smith, the moral philosopher, often warned of the perils of "the income of men who live to reap where they never sowed," but you won't hear him quoted in the bitumen republic of Alberta.
Binge spending, then hangovers
But oil also engenders a "spending effect." On this matter Alberta has become something of a petro state poster child.
During booms Alberta vomits cash and expands government, and during busts, it hacks off government services like some crazed surgeon jacked on cocaine.
To facilitate the recent bitumen gold rush it has invested billions in roads, hospitals and water treatment that industry, the boom's chief beneficiary, should have paid for in full.
A variety of left and right wing economists have identified binge spending in Alberta as a problem for decades. In fact running on public taxes instead of oil loot is the only honorable solution says Herb Emery and Ron Kneebone in a 2011 article.
Alberta must "redirect the revenues gained from the sale of resources away from the government's budget and toward saving," conclude the pair.
"This entails the establishment of some form of a fiscal rule: a commitment to long-term fiscal probity that enables the government to resist the demands for unsustainable spending increases or tax cuts. As we noted previously this is the solution to the problem of energy price volatility that has been successfully employed by energy-rich Norway and that has been frequently urged upon the Alberta government. Unfortunately, it is a solution that has eluded the government of Alberta."
But nobody listened.
Spending isn't the only disease. Alberta has a serious revenue collection crisis too. It still gives away its hydrocarbons at bargain basement prices and saves nothing. (In contrast Norway has stored away $600 billion for the day its wells run dry.)
Moreover the government has only collected its minimum target (a 50 per cent share of oil and gas profits) twice in the last decade. The Parkland Institute has calculated that Alberta Tories have left nearly $40 billion on the table for state owned corporations and multinationals to pocket over the last 10 years alone.
(When Fred Dunn, the former auditor general, repeatedly pointed out the scale of this neglect in 2007, 2008, 2009 and 2011, he was accused of overstepping his mandate.)
But if Big Oil took the same cavalier attitude toward meeting its fiscal targets as the Alberta government, their shareholders would have had their heads in buckets years ago.
Oil between the ears
Last but not least, petromania makes governments grossly incompetent. Easy wealth seems to discourage hard thinking, the same way scarcity stimulates innovation.
Alberta's idea of governance consists either of throwing money at a problem or making the problem bigger so more petro dollars can drown in ever larger pools of stupidity.
To solve a crisis in health care spending Alberta created a Soviet-like superboard which, of course, delivered less accountability and more bad service.
To deal with the province's growing carbon liabilities the province proposes an even larger insanity: it recommends that taxpayers fork over $50 billion over several decades to subsidize carbon capture and storage schemes -- that will waste energy and money in equal proportions and solve nothing.
The government has so botched electricity transmission with a sweetheart deal involving corruption-plagued SNC Lavalin that is has created a multi-billion scandal more significant than the so-called bitumen bubble. And on it goes.
Oil has dumbed Alberta down. The bitumen republic now gives away its resources. It doesn't save any money. It neglects ground water protection. It has no responsible tax regime. And its calcified one party state represents hydrocarbons instead of citizens because that's what petro states do.
In the end petro states are as incapable of reforming themselves as the Canadian senate. So take note citizens of British Columbia, Saskatchewan and Newfoundland: you've got a problem.
In a petro state politicians and business leaders become so tied to the perverse incentives of mining oil, says Terry Lynn Karl, that they "develop networks of complicity based on the classic exchange between the right to rule and the right to make money."
Such thinking, says Karl, "links economic and political outcomes in a manner akin to former socialist countries -- a reality that seems to elude most observers."
Redford, who might someday hold the Exxon Mobil Chair in Political Studies, has encountered "a bitumen bubble," and like every other petro leader she doesn't know how solve a problem of her own government's making.
BONUS GUIDE: 16 SYMPTOMS OF PETROMANIA
How do you know when you live in petro state? Here are some key signs:
When your government pays 30 per cent of its road, education, and hospital bills with finite and volatile hydrocarbon revenue.
When your province posts five budget deficits in a row during a so-called "bitumen boom."
When the billionaire owner of a hockey club (the Oilers) donates $430,000 to extend the 40-year rule of a one party state that ran out of ideas 30 years ago.
When Alberta Health says it can't comment on the public health impacts of hydraulic fracturing because Alberta Energy is responsible for "sustainable energy development."
When the government approves 100 bitumen projects over a ten-year period without a cumulative impact assessment.
When government officials ban the use of the word "tar sands" the same way the U.S. military forbade the use of the word "insurgency" in Iraq.
When your government fires the Chief Elections Officer, Lorne Gibson, in 2009 for doing his job and reporting on widespread electoral fraud.
When your former premier, Ed Stelmach, advises the Ukrainian government on how to sell shale gas development to a skeptical public concerned about groundwater contamination.
When most university research chairs acquire boutique petroleum brands such as the Enbridge Research Chair in Psychosocial Oncology; the Cenovus Chair in Canadian Plains Mitigation and Reclamation, the TransCanada Chair in Regulatory Law and the Talisman Chair for Sustainability and the Environment.
When prominent scientists such as David Schindler are vilified and slandered for reporting on documented water contamination from tar sands development in top science journals.
When your government estimates that cleaning up toxic waste in the tar sands will cost more than $20 billion but asks industry to set aside only $1 billion.
When politicians describe bitumen, a badly degraded tar enmeshed in sand, as "the jewel of hydrocarbons."
When the province's oil and gas regulator argues in Queen's Court that it owes "no duty of care" to Albertan landowners or the province's groundwater.
When a bunch of Calgary lawyers decide that the best market for their self-branded "ethical oil" are Chinese national oil firms directed by the world's leading moral philosophers, the Communist Party of China.
When other Canadians arrive in your province not to make a living but to make a killing.