“Empty the till”October 27th, 2007
Amid the reams of commentary and buckets of tears spilt over premier Ed Stelmach’s announcement of higher energy royalties Thursday, I keep coming back to two observations:
- We’re stealing from ourselves; and
- It’s profoundly self-destructive when the politics of envy, resentment and demagogy are directed at the source of our prosperity and our province’s economic strength.
Raising royalties on the industry that drives at least one-third of Alberta’s now-huge GDP of currently $216 billion is analogous to donning a balaclava, loading up a .45 calibre pistol, striding into a bank, pointing the gun at your own head and yelling: “Empty the till!”
First, it should be obvious that if even a portion of the scale-back in drilling, oil sands expansions and other energy investment takes place – if investment is scaled back by a mere $10 billion, say, instead of the $35 billion that some predict – the damage will outweigh any benefit to the government.
Layoffs, wage rollbacks, sagging house values, stagnant companies, opportunities foregone. And lest you put this down to “industry posturing”, trust me on this one: During my day-job I’m surrounded by energy patch clients large and small, and what they say in their dark, private, unguarded moments is no less dire than what the investment analysts and pension managers and big oil companies have been saying publicly.
Still, wealth not created is much harder to count, because it can’t be seen. On this level, it will be relatively easy, even if deeply cynical, for the provincial government to claim there’s no damage.
But there’s every prospect that the damage to the government itself will be severe. A 50 percent royalty rate on a well that’s never drilled amounts to, um, zero royalty dollars. As does the royalty on a barely-economic well that’s allowed to peter out and is shut in. Less drilling will mean less competition for new land leases, reducing the volume and price of land sales – a huge source of the government’s energy take.
Even one cancelled oil sands project erases one or two billion dollars of future provincial revenue – and CNRL alone has said it will cancel no fewer than four oil sands projects. To that we can add lower property tax revenues (due to fewer facilities existing), reduced corporate income tax revenue and of course much lower personal income tax revenue. Twelve-thousand laid-off workers would have paid perhaps $50 million in provincial income tax per year; instead, they’ll be consuming publicy funded entitlements.
It’s a simple illustration of the Laffer Curve which, though it’s assumed to be discredited merely through the volume of ridicule directed at it, has proved its validity time and again. Ontario cut taxes in the mid-90s – and government revenues soon shot up. The derided Bush tax cuts following 9-11 have seen U.S. federal revenues hit all-time records and its deficit shrink far faster than projected – bet you didn’t read that in the Globe and Mail.
And so, at the end of the day, higher royalties will make Alberta and practically everyone in it worse off. So much for the practical side of things.
Equally sad to me is the moral side: the casting aside of intelligent fact-based debate in favour of demagogy and the most negative, selfish emotions on the part of what appears to be a large portion of the Alberta public.
I was going to say it was a sad day when these politics emerge in Alberta. Then of course I had to admit that we’ve always practised them to some degree in Alberta. Historically, we at least had the smarts to direct our emotions outward. At times, this moved across a nasty divide into bigotry, as during the early Social Credit years when terms like “50 Big Shots” and “Eastern Monied Interests” sent out coded messages that exploited underlying anti-Semitism.
But during other periods, the resentment had a solid basis in fact – the high tariffs of the National Policy, for example, held back Alberta’s economic development for decades. That mentality lingered right through the 1970s and into the 80s with the longstanding restrictions on energy exports. Lifting those restrictions through free trade treaties and other energy deregulation allowed Alberta to blossom.
We might have had a touch of paranoia in our thinking – but some of the time, they really were out to get us, or at least to prevent Alberta from growing. The fact that, once we were unleashed our prosperity, population and national economic role all mushroomed suggests some of the previous anger was well-founded.
What we’re doing now, though – directed our anger at “Big Oil”, which happens to consist of, um, ourselves – is of a different nature. As mentioned above, the energy industry is the source of our remarkable and, within Canada, singular prosperity. It also happens to provide Alberta with much of its relevance to the nation’s economic and political life. Turning on this uniquely positive force is well and truly suicidal.