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Seven Busted Budgets? Change Alberta's Losing Game

Oil riches wasted discredit the 'Calgary School.' But a proven path to prosperity exists.

By Mitchell Anderson 19 Dec 2012 | TheTyee.ca

Mitchell Anderson is a freelance writer based in Vancouver. He recently travelled to Norway and published a series on that prosperous nation's oil policy for The Tyee.

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Alberta can't balance its books even though it sets and collects petroleum rents for 70 per cent of Canada's production. Oil dollar sign image: Shutterstock.

Last week Premier Alison Redford announced the province with supposedly the sharpest pencil in confederation will post their seventh consecutive deficit. Since 2008, Alberta has frittered away fully $20 billion in past oil wealth without saving a dime. The now-moribund Alberta Heritage Fund has not seen a penny of new petroleum money since 1987.

Alberta is responsible for setting and collecting petroleum rents for 70 per cent of Canada's production -- the sixth largest in the world. Why is the province that casts itself as the seat of sound fiscal management, now having to borrow money while cutting services and running deficits?

Norway produces roughly the same amount of oil as Alberta, yet this tiny nation has managed to salt away over $600 billion in accumulated oil wealth in a sovereign wealth fund that now amounts to more than one per cent of global equity markets.

Norway has no public debt, full employment and fully-funded social programs that Canadians would drool over. Norwegians enjoy free university tuition, universal day care and 25 days of paid holidays per year. Per capita spending on healthcare is thirty per cent higher in Norway; funding for arts and culture is more than three times higher than Canada.

Putting Canada's policies to shame

Our national debt just passed the $600 billion mark, meaning Norway is now $1.2 trillion ahead of Canada -- even as we eliminate 20,000 public sector jobs in a supposed effort to get our balance sheet to zero. (Read the related recent Tyee series reported from Norway here.)

How has Norway succeeded where the policies of the "Calgary School" have failed so miserably? By embracing two principles completely at odds with the economic ideology emanating from Alberta: high levels of taxation and strong public participation in the resource economy.

Seventy per cent of Norwegian oil production is controlled by oil companies owned by the Norwegian taxpayer. These generate direct profits, and act as a repository of technical know-how that strengthens the negotiating position of the Norwegian government with foreign companies.

Long ago, Norway decided that if they were going to control their resource destiny they had to build, own and operate their drill rigs, pipelines and oil refineries. Foreign companies know they can't blackmail the government on taxation rates since Norway could simply develop its own oil deposits if they left. This has allowed Norway to tax oil companies, including their own, at a rate of about 80 per cent.

Canada still dependent on foreign petroleum

Here in Canada we have been led to believe that companies would flee unless we further reduce taxation rates below the measly amounts they pay now. Corporate profits in Alberta more than doubled as portion of the economy between 1989 and 2008. Yet the combined federal/provincial taxation rate in the province fell from 33 per cent to 25 per cent between 2005 and 2012. While Norway makes four dollars for every dollar of private oil profit, Alberta collected less than 10 per cent royalties on all oil sands production in 2010.

Because Norway invested in public expertise and infrastructure it can act as senior business partner in resource extraction and value-added refining. Alberta is instead ramping up exports of raw bitumen. Not only is this material far more hazardous to transport than upgraded crude, these exports actually make Canada more dependent on foreign supplies since we now must import increasing amounts of condensate to dilute this thick tar for pipeline transport.

Canada remains 50 per cent dependent on foreign oil supplies from so-called unethical sources. We have nothing resembling a national energy strategy and our Prime Minister has not attended a premier's meeting in over three years to begin discussing one.

Canada is also the only country of the top 10 oil-producing nations (besides the U.S.) without a state-owned oil company. So offensive was Petro Canada to Albertans that Canada's remaining stake in the company was quietly sold off in 2004. Now we embrace takeovers of Canadian companies like Nexen by Chinese state-owned enterprises.

How to gain control of Canada's petro wealth

As a nation, obviously we can do better. For starters, Canada can increase our energy security by refining Alberta's oil wealth using excess capacity in Eastern Canada. Alberta is now selling crude to declining U.S. markets at a discount of $40 per barrel -- explaining the pell-mell pipeline push from the oil patch to the Pacific.

Rather than looking to Asia, the province could make a tidy profit by instead shipping oil through existing pipelines to underutilized refineries in Ontario, Quebec and the Maritimes. Quebec has two underused refineries, with a combined capacity of almost 400,000 barrels per day. Another in St. John New Brunswick can handle another 300,000 barrels per day. All are currently refining oil imported from elsewhere in the world and could give Alberta access to Atlantic Basin pricing and markets.

Brent Crude from the North Sea is currently selling for a whopping $60 per barrel more than Western Canadian Select -- a spread that costs Canada's economy $2.5 billion per month and only looks to widen over time.

Processing Alberta oil in Eastern Canada would not require any regulatory reboot of the ill-conceived and widely resented National Energy Program. This would merely be a freewill business transaction between private industry from different parts of our nation, perhaps with support from interested provincial governments (don't expect any leadership from Mr. Harper on this).

Moving oil east would be far more scalable if some of the 10 planned upgraders in Alberta were ever built. The world needs oil not tar, and oil is obviously far more fungible than asphalt. Piping crude to Eastern Canada instead of hazardous diluted bitumen would meet with far less opposition as well. Hopefully the oil patch has learned from their painful Northern Gateway experience that they cannot merely ram through whatever they wish.

If the Alberta government ever grew a spine they could facilitate value-added refining by restricting provincial exports of raw bitumen (and the jobs that go with it) with the stroke of a pen -- but don't hold your breath. The "Calgary School" has cowed provincial regulators and politicians to a truly humiliating extent.

Harmony and prosperity

The benefits of an east-west business alliance would include higher revenues and stable markets for Alberta, lower gas prices in Eastern Canada, and a big boost to the Canadian economy and our energy security. This would also avoid a long and divisive fight between Alberta and British Columbia over contentious bitumen pipelines and tanker traffic.

The only loser might be Mr. Harper. Always the tactician, activating his political base requires stoking east-west animosity rather than cultivating cooperation.

Such mutually profitable nation building might be a good first step towards Canada seeing itself as the resource powerhouse we are rather than competing provincial fiefdoms. It might also help to undo the enduring myth in Alberta that the rest of the country is somehow out to screw them. Who knows what could be accomplished if Canada started playing like a team.  [Tyee]

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