Monocolumn

A daily bulletin of news & opinion

6 February 2015

Not long ago, the place seemed awash with cash. But with oil prices more than halving over the past six months, Alberta, home of the controversial tar sands, is about to enter a period of severe bootstrapping.

Observers suggest that even if oil prices rebound modestly to $65 (€56) per barrel, there remains a strong possibility Canada’s richest province will slip into recession this year.

With the outlook so gloomy, Alberta’s premier, Jim Prentice, took an odd but populist first step last week announcing that the province’s legislators would be taking a five per cent pay cut. It only amounts to CAD600,000 (€420,000) in savings but its value is largely strategic. Public-sector workers understand the move likely means that cuts to their pay are next.

More helpfully, Prentice is the first premier in some time to talk seriously about restructuring the province’s finances and making its economy less vulnerable to price shocks. He is already floating a few ideas that in better times would’ve been thought heretical in conservative, avowedly free-market Alberta, such as introducing a sales tax and reconsidering its 10 per cent flat tax on income.

So far Prentice seems to think that’s enough. He’s refused the idea of increasing the royalties that oil producers pay, though numerous studies have suggested they’re too low. But cutbacks will get the government only a small part of the way to erasing its looming deficits. What the premier really needs to do is instigate a wholesale change in the province’s attitude to its non-renewable resource wealth.

He might start with fixing how the province saves for its future. The Alberta Heritage Savings Trust Fund, established in 1976, was created in that spirit: an account into which the province initially put away 30 per cent of its royalties from oil – money that could be invested to diversify its economy – or banked for the day when the oil starts to run out.

Unfortunately a succession of Alberta governments have made a habit of raiding the fund ad hoc for the annual budget. Spending the money, in effect, to preserve their popularity and ensure taxes stay unsustainably low. After the first decade of the fund’s existence governments barely contributed to it at all.

Norway, by comparison, has shown a much more serious approach to managing its oil wealth. Though it didn’t open its Government Pension Fund until 14 years after Alberta’s, today its assets stand at $700bn (€611bn). Alberta has only $14bn (€12.2bn) in its savings account.

While Norway’s light oil is generally worth more than Alberta’s heavy crude and its royalty rate is higher, the vast divergence also has much to do with politics. Rather than actually saving productively for the future, Alberta’s leaders have instead used its savings like a worry-free line of credit today.

Back in 2008, when the last bust was about to happen, the Organisation for Economic Co-operation and Development (OECD) recommended Alberta adopt a regime for managing its oil money more like Norway’s. The province’s treasurer at the time replied that Alberta had little to learn from anyone else. Perhaps this time around the province will show a little modesty.

Christopher Frey is Monocle's Toronto correspondent.

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