The perils of petro-states: The case of Alberta

Resource revenue states cannot continue operating on the basis of costly old models.

Investors are being cautioned against capital-intensive extreme resource extractions like bitumin [Reuters]

The current trajectories of Canada’s predominant political economies are increasingly dysfunctional, due in no small part to the fact that we have become, in many respects, a petro state, rather than the much vaunted “Energy Superpower” that we were promised.

A petro-state, as defined by Bruce Campbell, executive director of the Canadian Center for Policy Alternatives (CCPA) is “dependent on petroleum for 50 percent or more of export revenues, 25 percent or more of GDP, and 25 percent or more of government revenues”.

While Alberta is not a sovereign nation, it does qualify for “petro-state” status under this criterion. So does Norway. But the differences between the two polities end there. While Norway manages its resource wealth extraordinarily well, Alberta – and Canada, by extension – does not.

One significant difference is savings. Norway has a savings fund – “Sovereign Wealth Fund” – which is worth about $656bn for a population of under 5 million people.

Much of the manufacturing losses are tied to the rise of the petro-dollar which tends to rise and fall with the price of petroleum.

Perils of resource revenue

Alberta’s Heritage Trust Fund, on the other hand, is worth a relatively paltry $16.6bn, for a population of 3,847,100.

The differences in the sizes of these savings funds have far-reaching impacts. As author Terry L Karl explains in “Understanding the Resource Curse”, a country (such as Norway) that diverts its resource revenue to a savings fund, is necessarily compelled to use its tax base for government funding. Consequently, citizens pay higher taxes, but the politicians represent those who pay the bills (the citizens), rather than the insular interests of oil-producing corporations to the detriment of the public sector and democracy.

Unlike Norway, Canada is quite dependent on its resource revenues for government funding. About 40 percent of Canada’s resource revenues go to Ottawa, and about one third of Alberta’s bills are paid by oil and gas revenues. According to Karl, these differences explain why Alberta’s tax rates are so low – the lowest personal taxes in Canada – and why its governance is more top down, corporation-oriented. As long as taxes are low, people remain relatively disinterested in issues of governance. In the 2008 elections, 60 percent of eligible voters in Alberta stayed home.

There are other significant problems which are generated by this dependency on resource revenue. One of them is wealth distribution.

Stephen Leahy explains in “The Bigger Canada’s Energy Sector Gets, The Poorer People Become” that economic markers can be deceiving. Consider statistics for Gross Domestic Product (GDP), which is a measure of economic activity. The GDP averaged about $600bn per year in the 1990s, and by 2012 it had increased to $1.7 trillion. On the surface, this seems laudable, but little of the wealth stayed in Canada, and what did stay went to a small percentage of the population. Consequently, income inequality has also increased.

Similarly, our reliance on the boom/bust cycle of resource revenue funding (without setting aside sufficient funds) means that governments habitually overspend. Resource-rich Alberta has run a deficit for the last six years running.

Evils of the petro-dollar

This boom/bust revenue model, a hallmark of neoliberal economic theory, impacts the whole country. Safety, the environment and human rights have become less important; international efforts to address global warming, such as the Kyoto Protocol, and the United Nations Convention to Combat Desertification (UNCCD) have been rejected; real science is now seen as an enemy to overcome; and democracy is an inconvenience.

Our mixed economy is also being decimated. Leahy explains that from 2000-2011, the oil and gas sector created about 16,500 jobs, while, at the same time, Canada lost 520,000 manufacturing jobs.

Much of the manufacturing losses are tied to the rise of the petro-dollar which tends to rise and fall with the price of petroleum. Ten years ago, the Canadian dollar was worth about 65 cents relative to the US dollar. Now both dollars are at about the same level. This parity negatively impacts exports and, therefore, the manufacturing base.

Even Industry Canada acknowledges the problem. Their report notes that between 2002-2007, from 33 to 39 percent of Canadian manufacturing job losses were due to “resource-driven currency appreciation”.

Despite the overarching negatives, including job losses and deficits, trajectories of Canada’s reigning political economies have remained unchanged. Continued on-the-ground realities, however, may force the government’s hand. Sources as varied as the International Energy Agency (IEA), HSBC, the Conference Board of Canada, and the International Monetary Fund (IMF) are increasingly concerned about Canada’s misdirected obsession with extreme energy extraction.

The HSBC Global Research Report cautions investors about capital intensive extreme resource extraction such as bitumen extraction, and recommends instead low cost companies with a “gas bias”.

Evidence shouts that we should be transitioning to a low carbon model.

The Conference Board of Canada in an article entitled “Opportunity Lost? Alberta is Facing Short And Long Term Financial Challenges Despite its Oil Wealth,” observes that Alberta is facing a $4bn budget deficit, and recommends a “more sustainable fiscal model”.

Meanwhile, the IMF, recognising the imperatives of transitioning to a low carbon world, is urging nations to slash carbon subsidies, which would drastically slow bitumen extraction developments.

Unlike Norway, Canada’s economic and political self-determination is already curtailed by NAFTA, and by the time Prime Minister Stephen Harper’s next suite of corporate empowerment treaties (FIPPA, CETA etc.) are ratified, our ability to determine better political economies will be further hamstrung.

However, despite the restrictions, there still remain some possible alternatives to our current self-defeating political economy.

The Pembina Institute, paralleling views of the IMF, argues that the $1.3bn in subsidies handed out to the oil and gas industries would be better spent on transitioning to clean energies, as it would create 18,000 more jobs as well as “a healthier economy, and a cleaner environment”.

Meanwhile, Shannon Stunden Bower, Research Director for the Parkland Institute, advises that Alberta needs to raise taxes: “Alberta”, she explains, “could collect nearly $11bn more in taxes and still remain the country’s lowest tax jurisdiction.”

Clearly Canada’s economic direction, which is to increase rather than decrease extreme energy extraction, is hitting the wall.

Evidence shouts that we should be transitioning to a low carbon model. Creating a strong Federal Savings Fund, reducing carbon subsidies, and increasing taxes in certain jurisdictions – like Alberta and New Brunswick – would be a start, but we also need more evidence-based policy making, and therefore different governance.

The longer we wait before the inevitable and necessary transitions, the more it will cost.

Mark Taliano is a retired high school teacher who spends much of his time as an activist and citizen journalist.