Who's doing the math here?

by Ricardo Acuña
Vue Weekly (Edmonton)
July 02, 2009

Province announces $3 billion royalty break, needs to trim $2 billion from budget

Last week, a friend of mine posted some Edmonton Journal news stories on her Facebook page, and followed them up with the question, "Who's doing the math in this stupid province?" It's a question that really is hard to fathom, especially given the various announcements and policy initiatives undertaken by the provincial government over the last couple of weeks.

An announcement at the end of June provided an especially glaring indication that it would seem as though the Conservative caucus had lost all of its calculators, and that its collective mental capacity was not up to the mathematical challenge of understanding that two minus three equals negative one.

Unlike the provincial government, gas companies can generally do math.

On that day, Alberta Treasury Minister Lloyd Snelgrove called together leaders from Alberta's labour movement, Alberta's professional associations and various other community groups. In total, close to 100 people were summoned to hear Minister Snelgrove tell them that the province was in serious financial trouble and would soon need to identify $2 billion in savings if they were to meet next year's budget goals.

The government claimed the meeting was intended to let key stakeholders in on the fiscal challenges facing the province over the next year, and invite them to be active participants in finding solutions to those challenges. A more cynical view, however, would suggest that the meeting was intended to issue a warning to these groups that once again they are about to bear the brunt of the government's financial mismanagement and that they should keep their funding requests, salary expectations and programming requirements way, way down.

We saw something similar in the Klein years, when the former premier brow-beat provincial unions and organizations into voluntarily taking wage rollbacks, on the understanding that if they did so they would be saving the jobs of their colleagues and securing service levels for their constituencies. Of course, after all the unions agreed to cooperate and take the rollbacks, their colleagues still got fired and their operating budgets still got decimated.

Alberta's labour leaders, in particular, would do well to keep that history in mind as they ponder what they were told at that Thursday meeting.

At pretty much the exact same time that Minister Snelgrove was asking the assembled leaders to help him find $2 billion in cuts, Alberta's Energy Minister Mel Knight was also talking about Alberta's economy. He had assembled the press to announce to them that effective immediately the province would be providing Alberta's natural gas industry with a brand new $1.5 billion royalty break. He also announced the extension of two royalty breaks initially announced last March.

In total, the cost to provincial coffers of these breaks would be in the neighbourhood of $3 billion over the next two years.

The theory behind the natural gas royalty breaks is that they will encourage gas companies to begin drilling again, despite the depressed North American gas market. What this policy fails to take into account is that gas prices are down as a result of a significant amount of new gas coming online in the United States. Bringing more Alberta gas online will only succeed in bringing prices down further.

The government also ignores the reality that gas companies are leaving the Alberta market because our gas deposits are old and our reserves dwindling, as opposed to those in Saskatchewan and BC, which have barely been tapped and have a long future ahead of them.

Unlike the provincial government, gas companies can generally do math. They seen no sense in putting holes in the ground when the resource is $3.25 per thousand cubic feet, regardless of what the royalty rate might be.

Likewise, the activity of oil companies in Alberta's oil patch is not determined first and foremost by royalty rates, but rather by the price of the resource. The spring royalty break failed to stimulate drilling because the price of oil remained at under $50 per barrel for the better part of the winter and spring.

Now that the price of oil is pushing $70 per barrel again, activity in the oil patch will slowly begin to pick up. Here again, oil companies are not stupid — they know better than to take $50 oil out of the ground when they can wait and take that same oil out of the ground at $75 or better.

The bottom line is that the $3 billion in royalty breaks will accomplish neither increased drilling or economic stimulus.

Add to that the reality, established in the government's own job and economic multiplier numbers, that energy extraction actually results in the lowest job creation and GDP creation per dollar invested of almost all sectors of the economy, and you wonder what exactly the government is trying to do. Is it really just a matter of padding the pockets of their friends in the oil and gas sectors?

In short, the only thing these new royalty breaks will accomplish is a $3 billion hole in the government's coffers over the next two years. Apparently, the way they have decided to pay for this $3 billion shortfall is by taking it directly out of the pockets of public servants and out of the public services and programs that Albertans rely on.

It really is simple math. If you need to come up with $2 billion in reduced expenses, your first step should not be to give up $3 billion worth of revenue. Not introducing the royalty breaks would not only eliminate the need to cut the $2 billion from the budget, it would leave an extra billion kicking around for spending on things like health care (which is also about to have its budget decimated), infrastructure, schools and education, arts and culture and social services.

All of the areas cut, by the way, generate more job creation and GDP growth per dollar invested than does the oil and gas sector.

The question my friend asked on Facebook is really the question all Albertans should be asking. Who is doing the math in this province, and who benefits from their inability to add and subtract? The sooner Albertans figure that out, the sooner we can get on with the business of electing a government that manages our dollars in our interests rather than mismanaging them in the interest of the oil and gas sector. Isn't it time the numbers started getting crunched in our favour?

Ricardo Acuña is Executive Director of the Parkland Institute, a non-partisan public policy research institute housed at the University of Alberta.