Bitumen bubble gives Alberta the vapours: Greenspon

Alberta Premier Alison Redford brought her sad tale of budgetary woe to Ontario last week. Her province isn’t collecting enough money for its oil. It suffers from overreliance on a single export market. That market is not as needy as it once was. And so Alberta is headed for a $6-billion surge in its deficit. Her finance minister described the situation as a perfect storm.

Cry me a Bitumen Bubble.

Has ever there been a province so lax in its fiscal management and so derelict in its policy duties as Canada’s petro-superpower?

Perfect storms arise from an unusual array of natural forces. What’s happening in Alberta is the predictable outcome of three decades of policy indifference and political pandering. If these were storms, they would go by the names of Don, Ralph and Ed — the province’s three premiers from the mid-1980s till 16 months ago. Will Alison be blown off course, too?

Redford’s so-called bitumen bubble is a familiar phenomenon more commonly known as the price differential. Alberta’s sludgy crude requires extra processing. So it sells at a discount to the benchmark West Texas Intermediate price. The situation is aggravated by swelling U.S. production and plugged pipelines. As a result, the differential has widened to $30-$40 a barrel, more than twice the province’s expectation.

Unfortunate. But at every juncture, Alberta has opted for poor policy choices or no policy choices rather than get in front of its vulnerabilities. The victim card doesn’t play well.

Alberta’s petroleum potentates apparently have only recently discovered they a) rely on the U.S. for virtually all their exports and b) are a landlocked jurisdiction. They had thoroughly convinced themselves they commanded a captive market to the south even though the U.S. fervently spreads its purchases around. It was the supplier was wholly dependent.

A pattern of chronic misjudgment is evident. Decision-makers have long favoured PR over R&D, failed to diversify markets, shown a weak grasp of pipeline politics and promoted a headlong rush on oilsands development without first figuring out how to produce the stuff in a globally acceptable manner.

But the worst policy mistakes have occurred in the fiscal realm. Alberta, though reliant on a non-renewable resource and prone to boom and bust cycles, has inculcated into its political culture a virulent anti-tax mindset alongside drunken spending habits. Rather than smoothing the waves, fiscal policy rides them up and down, with deficits regularly crashing ashore.

In 1976, Premier Peter Lougheed, the father of modern Alberta, created the Alberta Heritage Savings Trust Fund. Reasoning the energy gift wouldn’t give forever, he aimed to invest in economic diversification, save for future generations and bridge inevitable downturns along the way. Long before sovereign wealth funds became the rage, he set aside 30 per cent of energy royalty revenues a year. Good, prudent, conservative fiscal management from a Conservative government.

When Lougheed left office in 1985, the fund stood at $12 billion, although the 1982 recession was testing resolve. His successors reduced contributions and normalized raids on the kitty. Between 1987 and 2005, no deposits were made. The fund became a device for topping up the budget, in good years and bad.

Today, the heritage fund’s website boasts of $34 billion that has been directed to ongoing priorities. Its value is little more than in 1985. Rather than saving for rainy days, governments conjoined ever higher spending and the lowest taxes in the country, figuring they would secure a superior political return on investment versus the delayed gratification of sharing the wealth with future generations. Oddly, they still called themselves Conservatives.

In 1996, 20 years after Lougheed, the government of Norway, with a population only 1 million greater than Alberta, created its own oil savings fund. As of last September, it was worth $658 billion, more than 40 times the size of Alberta’s.

Just before he died last year, Lougheed wrote presciently in the Calgary Herald that the way things were going, “when a real resource revenue disaster strikes, Albertans will not have the fund as a shield.”

To her credit, a hemmed-in Redford is thinking forward. Following on visits to Ontario and Quebec, she is meeting this week with Premier David Alward of New Brunswick, home to the massive Irving refinery, to discuss a potential east-west solution.

The lesson here: good policy makes possible better outcomes. Bad policy will come back to bite you.

Bitumen bubbles happen. The Norwegians are prepared. Alberta is late to the game it invented.

Original Article
Source: thestar.com
Author: Edward Greenspon